We Think Elevance Health (NYSE:ELV) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Elevance Health, Inc. (NYSE:ELV) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Elevance Health

What Is Elevance Health's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Elevance Health had debt of US$24.1b, up from US$23.0b in one year. However, its balance sheet shows it holds US$34.3b in cash, so it actually has US$10.2b net cash.

How Healthy Is Elevance Health's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Elevance Health had liabilities of US$39.7b due within 12 months and liabilities of US$26.7b due beyond that. Offsetting this, it had US$34.3b in cash and US$16.2b in receivables that were due within 12 months. So it has liabilities totalling US$15.8b more than its cash and near-term receivables, combined.

Since publicly traded Elevance Health shares are worth a very impressive total of US$113.1b, 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. Despite its noteworthy liabilities, Elevance Health boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Elevance Health saw its EBIT drop by 3.3% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Elevance Health's ability to maintain a healthy balance sheet going forward. 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 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 93% 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$10.2b. And it impressed us with free cash flow of US$7.2b, being 93% of its EBIT. So is Elevance Health's debt a risk? It doesn't seem so to us. 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. Be aware that Elevance Health is showing 1 warning sign in our investment analysis , you should know about...

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.