IDP Education (ASX: IEL) seems to be using debt quite wisely
Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Mostly, IDP Education Limited (ASX: IEL) is in debt. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for IDP Education
How much debt does the education of displaced people carry?
The image below, which you can click for more details, shows that IDP Education was in debt of A $ 59.3 million at the end of December 2020, a reduction from A $ 62.7 million. over a year. But he also has A $ 292.8 million in cash to make up for that, which means he has net cash of A $ 233.5 million.
How healthy is IDP Education’s track record?
The latest balance sheet data shows that IDP Education had debts of AUD 205.6 million due within one year, and debts of AUD 82.0 million due thereafter. In compensation for these obligations, it had cash of A $ 292.8 million as well as receivables valued at A $ 121.7 million maturing within 12 months. So he actually has A $ 127.0 million After liquid assets as total liabilities.
This short-term liquidity is a sign that IDP Education could probably repay its debt easily, as its balance sheet is far from tight. In short, IDP Education has net cash, so it’s fair to say that it doesn’t have a heavy debt load!
In fact, IDP Education’s saving grace is its low level of debt, as its EBIT has fallen 54% in the past twelve months. When it comes to paying down debt, lower income is no more helpful to your health than sugary sodas. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether IDP Education can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. IDP Education may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and capacity. to manage debt. Over the past three years, IDP Education has generated strong free cash flow equivalent to 73% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
While we agree with those investors who find the debt of concern, you should keep in mind that IDP Education has net cash of AU $ 233.5 million, as well as more than $ 25 million in liquid assets. passive. The icing on the cake was that he converted 73% of that EBIT into free cash flow, bringing in AU $ 54 million. We are therefore not concerned with the use of debt by IDP Education. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 2 warning signs for educating displaced people that you need to be aware of.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth net stocks today.
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