Edwards Lifesciences (NYSE:EW) Could Easily Take On More 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Edwards Lifesciences Corporation (NYSE:EW) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Edwards Lifesciences

What Is Edwards Lifesciences's Debt?

The chart below, which you can click on for greater detail, shows that Edwards Lifesciences had US$595.9m in debt in March 2022; about the same as the year before. However, its balance sheet shows it holds US$1.50b in cash, so it actually has US$900.0m net cash.

How Strong Is Edwards Lifesciences' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Edwards Lifesciences had liabilities of US$949.9m due within 12 months and liabilities of US$1.63b due beyond that. On the other hand, it had cash of US$1.50b and US$686.2m worth of receivables due within a year. So it has liabilities totalling US$392.9m more than its cash and near-term receivables, combined.

Having regard to Edwards Lifesciences' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$57.8b 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.

Another good sign is that Edwards Lifesciences has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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'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. Edwards Lifesciences may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Edwards Lifesciences recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

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$900.0m. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in US$1.4b. So we don't think Edwards Lifesciences's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Edwards Lifesciences .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.