Scholastic (NASDAQ:SCHL) Seems To Use Debt Quite Sensibly

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.' 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. We note that Scholastic Corporation (NASDAQ:SCHL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Scholastic

What Is Scholastic's Debt?

As you can see below, at the end of February 2024, Scholastic had US$31.5m of debt, up from US$5.20m a year ago. Click the image for more detail. However, it does have US$110.4m in cash offsetting this, leading to net cash of US$78.9m.

How Strong Is Scholastic's Balance Sheet?

According to the last reported balance sheet, Scholastic had liabilities of US$608.5m due within 12 months, and liabilities of US$109.1m due beyond 12 months. Offsetting these obligations, it had cash of US$110.4m as well as receivables valued at US$282.9m due within 12 months. So it has liabilities totalling US$324.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Scholastic has a market capitalization of US$1.01b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

It is just as well that Scholastic's load is not too heavy, because its EBIT was down 23% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Scholastic can strengthen its balance sheet over time. 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 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. Over the last three years, Scholastic actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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$78.9m. The cherry on top was that in converted 139% of that EBIT to free cash flow, bringing in US$136m. So we don't have any problem with Scholastic's use of debt. 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 Scholastic's earnings per share history for free.

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.