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, Edwards Lifesciences Corporation (NYSE:EW) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Edwards Lifesciences Carry?
The image below, which you can click on for greater detail, shows that Edwards Lifesciences had debt of US$594.1m at the end of June 2019, a reduction from US$1.19b over a year. But on the other hand it also has US$934.3m in cash, leading to a US$340.2m net cash position.
How Strong Is Edwards Lifesciences’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Edwards Lifesciences had liabilities of US$697.0m due within 12 months and liabilities of US$1.38b due beyond that. On the other hand, it had cash of US$934.3m and US$609.6m worth of receivables due within a year. So its liabilities total US$529.3m more than the combination of its cash and short-term receivables.
Having regard to Edwards Lifesciences’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$47.1b company is struggling for cash, we still think it’s worth monitoring its balance sheet. While it does have liabilities worth noting, Edwards Lifesciences also has more cash than debt, so we’re pretty confident it can manage its debt safely.
And we also note warmly that Edwards Lifesciences grew its EBIT by 16% last year, making its debt load easier to handle. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Edwards Lifesciences’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 company can only pay off debt with cold hard cash, not accounting profits. While Edwards Lifesciences 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 most recent three years, Edwards Lifesciences recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
We could understand if investors are concerned about Edwards Lifesciences’s liabilities, but we can be reassured by the fact it has has net cash of US$340.2m. So we don’t think Edwards Lifesciences’s use of debt is risky. Another factor that would give us confidence in Edwards Lifesciences would be if insiders have been buying shares: if you’re conscious of that signal too, you can find out instantly by clicking this link.
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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