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.' 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. Importantly, Scholastic Corporation (NASDAQ:SCHL) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Scholastic

How Much Debt Does Scholastic Carry?

The image below, which you can click on for greater detail, shows that Scholastic had debt of US$89.5m at the end of August 2021, a reduction from US$219.9m over a year. But on the other hand it also has US$308.6m in cash, leading to a US$219.1m net cash position.

A Look At Scholastic's Liabilities

Zooming in on the latest balance sheet data, we can see that Scholastic had liabilities of US$661.6m due within 12 months and liabilities of US$114.1m due beyond that. Offsetting these obligations, it had cash of US$308.6m as well as receivables valued at US$279.7m due within 12 months. So its liabilities total US$187.4m more than the combination of its cash and short-term receivables.

Since publicly traded Scholastic shares are worth a total of US$1.24b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Scholastic also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that Scholastic improved its EBIT from a last year's loss to a positive US$24m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Scholastic 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Scholastic has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Scholastic actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Scholastic does have more liabilities than liquid assets, it also has net cash of US$219.1m. And it impressed us with free cash flow of US$119m, being 497% of its EBIT. So we don't have any problem with Scholastic's use of debt. 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. For example, we've discovered 3 warning signs for Scholastic (1 can't be ignored!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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