Elevance Health (NYSE:ELV) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Elevance Health, Inc. (NYSE:ELV) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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. 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.

See our latest analysis for Elevance Health

What Is Elevance Health's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Elevance Health had debt of US$27.1b, up from US$24.8b in one year. However, it does have US$37.9b in cash offsetting this, leading to net cash of US$10.8b.

How Strong Is Elevance Health's Balance Sheet?

We can see from the most recent balance sheet that Elevance Health had liabilities of US$42.0b falling due within a year, and liabilities of US$30.6b due beyond that. Offsetting this, it had US$37.9b in cash and US$18.4b in receivables that were due within 12 months. So it has liabilities totalling US$16.3b more than its cash and near-term receivables, combined.

Since publicly traded Elevance Health shares are worth a very impressive total of US$94.4b, 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, Elevance Health also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Elevance Health has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Elevance Health 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Elevance Health 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, Elevance Health recorded free cash flow worth 69% 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.

Summing Up

While Elevance Health does have more liabilities than liquid assets, it also has net cash of US$10.8b. And we liked the look of last year's 21% year-on-year EBIT growth. So we don't think Elevance Health's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Elevance Health has 2 warning signs we think you should be aware of.

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.