Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies CIBT Education Group Inc. (EAST: MBA) resorts to debt. But does this debt worry shareholders?
What risk does debt carry?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check opportunities and risks within the CA Consumer Services industry.
What is CIBT Education Group’s net debt?
As you can see below, CIBT Education Group had C$240.9 million in debt as of May 2022, about the same as the previous year. You can click on the graph for more details. However, since he has a cash reserve of C$11.4 million, his net debt is less, at around C$229.5 million.
A look at the responsibilities of CIBT Education Group
The latest balance sheet data shows that CIBT Education Group had liabilities of C$235.3 million due within one year, and liabilities of C$79.0 million falling due thereafter. On the other hand, it had liquid assets of 11.4 million Canadian dollars and 47.9 million Canadian dollars of receivables due within one year. It therefore has liabilities totaling C$255.0 million more than its cash and short-term receivables, combined.
This deficit casts a shadow over the C$30.6 million business, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. After all, CIBT Education Group would likely need a significant recapitalization if it were to pay its creditors today.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
CIBT Education Group shareholders face the double whammy of a high net debt to EBITDA ratio (31.1) and quite low interest coverage, as EBIT is only 0.43 times interest charges. The debt burden here is considerable. On the bright side, CIBT Education Group has increased its EBIT by 64% over the past year. Like the milk of human kindness, this type of growth increases resilience, making the business more capable of managing debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of CIBT Education Group that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, CIBT Education Group has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our point of view
To be frank, CIBT Education Group’s interest coverage and track record of keeping total liabilities under control makes us rather uncomfortable with its level of leverage. But at least it’s decent enough to convert EBIT to free cash flow; it’s encouraging. Once we consider all of the above factors together, it seems to us that CIBT Education Group’s debt makes it a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 3 warning signs for CIBT Education Group (2 are potentially serious) you should be aware.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
Valuation is complex, but we help make it simple.
Find out if CIBT Education Group is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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