These 4 Measures Indicate That Elevance Health (NYSE:ELV) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Elevance Health, Inc. (NYSE:ELV) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Elevance Health

How Much Debt Does Elevance Health Carry?

As you can see below, at the end of June 2023, Elevance Health had US$25.1b of debt, up from US$23.6b a year ago. Click the image for more detail. However, its balance sheet shows it holds US$38.3b in cash, so it actually has US$13.2b net cash.

How Healthy Is Elevance Health's Balance Sheet?

The latest balance sheet data shows that Elevance Health had liabilities of US$41.6b due within a year, and liabilities of US$29.3b falling due after that. On the other hand, it had cash of US$38.3b and US$16.3b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$16.3b.

Given Elevance Health has a humongous market capitalization of US$103.7b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

Fortunately, Elevance Health grew its EBIT by 6.0% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Elevance Health generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Elevance Health does have more liabilities than liquid assets, it also has net cash of US$13.2b. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in US$11b. So we don't think Elevance Health's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Elevance Health, you may well want to click here to check an interactive graph of its earnings per share history.

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.