Is Educational Development (NASDAQ:EDUC) Using Too Much Debt?

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.' 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 Educational Development Corporation (NASDAQ:EDUC) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Educational Development

What Is Educational Development's Debt?

The image below, which you can click on for greater detail, shows that Educational Development had debt of US$33.9m at the end of November 2023, a reduction from US$44.3m over a year. However, because it has a cash reserve of US$3.16m, its net debt is less, at about US$30.7m.

A Look At Educational Development's Liabilities

The latest balance sheet data shows that Educational Development had liabilities of US$20.2m due within a year, and liabilities of US$28.2m falling due after that. Offsetting these obligations, it had cash of US$3.16m as well as receivables valued at US$1.85m due within 12 months. So its liabilities total US$43.4m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$15.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Educational Development would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Educational Development will need earnings to service that debt. 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.

In the last year Educational Development had a loss before interest and tax, and actually shrunk its revenue by 41%, to US$57m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Educational Development's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$6.3m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. However, we note that trailing twelve month EBIT is worse than the free cash flow of US$9.7m and the profit of US$241k. So there is arguably potential that the company is going to turn things around. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 5 warning signs with Educational Development (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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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