These 4 Measures Indicate That New Oriental Education & Technology Group (NYSE:EDU) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies New Oriental Education & Technology Group Inc. (NYSE:EDU) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for New Oriental Education & Technology Group

How Much Debt Does New Oriental Education & Technology Group Carry?

The image below, which you can click on for greater detail, shows that New Oriental Education & Technology Group had debt of US$14.4m at the end of August 2023, a reduction from US$44.2m over a year. However, its balance sheet shows it holds US$4.12b in cash, so it actually has US$4.10b net cash.

How Strong Is New Oriental Education & Technology Group's Balance Sheet?

The latest balance sheet data shows that New Oriental Education & Technology Group had liabilities of US$2.37b due within a year, and liabilities of US$328.8m falling due after that. On the other hand, it had cash of US$4.12b and US$43.8m worth of receivables due within a year. So it actually has US$1.47b more liquid assets than total liabilities.

This short term liquidity is a sign that New Oriental Education & Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, New Oriental Education & Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Although New Oriental Education & Technology Group made a loss at the EBIT level, last year, it was also good to see that it generated US$317m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if New Oriental Education & Technology Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. New Oriental Education & Technology Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, New Oriental Education & Technology Group actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that New Oriental Education & Technology Group has net cash of US$4.10b, as well as more liquid assets than liabilities. The cherry on top was that in converted 267% of that EBIT to free cash flow, bringing in US$848m. So is New Oriental Education & Technology Group's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of New Oriental Education & Technology Group's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.