Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Stride, Inc. (NYSE:LRN) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Stride Carry?

The chart below, which you can click on for greater detail, shows that Stride had US$414.3m in debt in March 2024; about the same as the year before. But on the other hand it also has US$551.5m in cash, leading to a US$137.2m net cash position.

How Strong Is Stride's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Stride had liabilities of US$282.0m due within 12 months and liabilities of US$507.0m due beyond that. Offsetting this, it had US$551.5m in cash and US$577.8m in receivables that were due within 12 months. So it can boast US$340.3m more liquid assets than total liabilities.

This surplus suggests that Stride has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Stride boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Stride has boosted its EBIT by 55%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Stride's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Stride 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. During the last three years, Stride generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Stride has net cash of US$137.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$141m, being 86% of its EBIT. So is Stride's debt a risk? It doesn't seem so to us. We'd be very excited to see if Stride insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com