The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that TAL Education Group (NYSE:TAL) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is TAL Education Group's Net Debt?

As you can see below, at the end of August 2024, TAL Education Group had US$6.35m of debt, up from none a year ago. Click the image for more detail. However, it does have US$3.45b in cash offsetting this, leading to net cash of US$3.45b.

A Look At TAL Education Group's Liabilities

The latest balance sheet data shows that TAL Education Group had liabilities of US$1.29b due within a year, and liabilities of US$298.2m falling due after that. Offsetting this, it had US$3.45b in cash and US$394.0k in receivables that were due within 12 months. So it can boast US$1.86b more liquid assets than total liabilities.

This excess liquidity is a great indication that TAL Education Group's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that TAL Education Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if TAL Education Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year TAL Education Group wasn't profitable at an EBIT level, but managed to grow its revenue by 54%, to US$1.8b. With any luck the company will be able to grow its way to profitability.

So How Risky Is TAL Education Group?

While TAL Education Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$72m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 54% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for TAL Education Group you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.