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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.' 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. Importantly, IDP Education Limited (ASX:IEL) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for IDP Education
What Is IDP Education's Net Debt?
As you can see below, at the end of December 2018, IDP Education had AU$64.4m of debt, up from AU$47.1m a year ago. Click the image for more detail. On the flip side, it has AU$54.8m in cash leading to net debt of about AU$9.65m.
A Look At IDP Education's Liabilities
We can see from the most recent balance sheet that IDP Education had liabilities of AU$133.9m falling due within a year, and liabilities of AU$71.1m due beyond that. Offsetting these obligations, it had cash of AU$54.8m as well as receivables valued at AU$109.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$41.2m.
Having regard to IDP Education's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$4.78b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, IDP Education has virtually no net debt, so it's fair to say it does not have a heavy debt load!
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.