Is Scholastic (NASDAQ:SCHL) A Risky Investment?

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 Scholastic Corporation (NASDAQ:SCHL) makes use of debt. But the more important question is: how much risk is that debt creating?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Scholastic

What Is Scholastic's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Scholastic had US$6.30m of debt in August 2022, down from US$89.5m, one year before. However, its balance sheet shows it holds US$239.7m in cash, so it actually has US$233.4m net cash.

How Healthy Is Scholastic's Balance Sheet?

The latest balance sheet data shows that Scholastic had liabilities of US$668.3m due within a year, and liabilities of US$97.1m falling due after that. Offsetting this, it had US$239.7m in cash and US$283.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$242.4m.

Given Scholastic has a market capitalization of US$1.28b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Scholastic also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Scholastic grew its EBIT by 79% 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 Scholastic's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Scholastic 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, Scholastic 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

Although Scholastic's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$233.4m. The cherry on top was that in converted 150% of that EBIT to free cash flow, bringing in US$59m. So we don't think Scholastic's use of debt is risky. We'd be very excited to see if Scholastic 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.

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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.