Yahoo Finance New Oriental Education & Technology Group (NYSE:EDU) Has A Rock Solid Balance Sheet
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.' 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 New Oriental Education & Technology Group Inc. (NYSE:EDU) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for New Oriental Education & Technology Group
What Is New Oriental Education & Technology Group's Debt?
The image below, which you can click on for greater detail, shows that at May 2019 New Oriental Education & Technology Group had debt of US$96.5m, up from none in one year. But on the other hand it also has US$3.19b in cash, leading to a US$3.10b net cash position.
A Look At New Oriental Education & Technology Group's Liabilities
We can see from the most recent balance sheet that New Oriental Education & Technology Group had liabilities of US$2.01b falling due within a year, and liabilities of US$115.2m due beyond that. Offsetting this, it had US$3.19b in cash and US$45.9m in receivables that were due within 12 months. So it actually has US$1.12b more liquid assets than total liabilities.
This short term liquidity is a sign that New Oriental Education & Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that New Oriental Education & Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely.
And we also note warmly that New Oriental Education & Technology Group grew its EBIT by 15% last year, making its debt load easier to handle. 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 New Oriental Education & Technology Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. New Oriental Education & Technology Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, New Oriental Education & Technology Group actually produced more free cash flow than EBIT over the last three 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
While it is always sensible to investigate a company's debt, in this case New Oriental Education & Technology Group has US$3.1b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$562m, being 198% of its EBIT. So we don't think New Oriental Education & Technology Group's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in New Oriental Education & Technology Group, you may well want to click here to check an interactive graph of its earnings per share history.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
