We Think K12 (NYSE:LRN) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, K12 Inc. (NYSE:LRN) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for K12

What Is K12's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 K12 had US$287.8m of debt, an increase on none, over one year. However, it does have US$308.8m in cash offsetting this, leading to net cash of US$21.0m.

How Healthy Is K12's Balance Sheet?

The latest balance sheet data shows that K12 had liabilities of US$236.0m due within a year, and liabilities of US$449.5m falling due after that. Offsetting these obligations, it had cash of US$308.8m as well as receivables valued at US$419.6m due within 12 months. So it can boast US$42.9m more liquid assets than total liabilities.

This surplus suggests that K12 has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, K12 boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, K12 grew its EBIT by 61% over the last twelve months, and that growth will make it easier to handle its debt. 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 K12's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While K12 has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, K12 actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case K12 has US$21.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$12m, being 102% of its EBIT. So we don't think K12's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for K12 (of which 1 shouldn't be ignored!) you should know about.

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. 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.
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