These 4 Measures Indicate That Centene (NYSE:CNC) Is Using Debt Reasonably Well

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.' 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. We can see that Centene Corporation (NYSE:CNC) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Centene

How Much Debt Does Centene Carry?

As you can see below, Centene had US$17.8b of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$19.4b in cash to offset that, meaning it has US$1.63b net cash.

How Strong Is Centene's Balance Sheet?

According to the last reported balance sheet, Centene had liabilities of US$31.3b due within 12 months, and liabilities of US$25.8b due beyond 12 months. Offsetting these obligations, it had cash of US$19.4b as well as receivables valued at US$13.6b due within 12 months. So it has liabilities totalling US$24.1b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its very significant market capitalization of US$38.9b, so it does suggest shareholders should keep an eye on Centene's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Centene also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Centene grew its EBIT at 15% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Centene 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Centene 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 three years, Centene 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

Although Centene's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$1.63b. The cherry on top was that in converted 132% of that EBIT to free cash flow, bringing in US$7.7b. So we are not troubled with Centene's debt use. We'd be motivated to research the stock further if we found out that Centene insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.