Stride (NYSE:LRN) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Stride, Inc. (NYSE:LRN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Stride

What Is Stride's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Stride had US$299.3m of debt, an increase on US$100.0m, over one year. But on the other hand it also has US$403.4m in cash, leading to a US$104.1m net cash position.

How Strong Is Stride's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Stride had liabilities of US$306.2m due within 12 months and liabilities of US$466.4m due beyond that. Offsetting these obligations, it had cash of US$403.4m as well as receivables valued at US$369.3m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Stride's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$1.47b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Stride has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Stride grew its EBIT by 227% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Stride'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Stride 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. Over the last three years, Stride actually produced more free cash flow than EBIT. 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 Stride has US$104.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$82m, being 107% of its EBIT. So we don't think Stride's use of debt is risky. We'd be very excited to see if Stride insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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