We Think New Oriental Education & Technology Group (NYSE:EDU) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies New Oriental Education & Technology Group Inc. (NYSE:EDU) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for New Oriental Education & Technology Group

What Is New Oriental Education & Technology Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that New Oriental Education & Technology Group had US$14.4m of debt in November 2023, down from US$15.1m, one year before. But it also has US$4.45b in cash to offset that, meaning it has US$4.43b net cash.

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

We can see from the most recent balance sheet that New Oriental Education & Technology Group had liabilities of US$2.66b falling due within a year, and liabilities of US$370.8m due beyond that. Offsetting this, it had US$4.45b in cash and US$40.8m in receivables that were due within 12 months. So it actually has US$1.45b more liquid assets than total liabilities.

This surplus suggests that New Oriental Education & Technology Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that New Oriental Education & Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, New Oriental Education & Technology Group grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine New Oriental Education & Technology Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case New Oriental Education & Technology Group has US$4.43b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$1.1b, being 184% of its EBIT. So is New Oriental Education & Technology Group's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in New Oriental Education & Technology Group, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.