Edwards Lifesciences (NYSE:EW) Seems To Use Debt Rather Sparingly

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.' 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. As with many other companies Edwards Lifesciences Corporation (NYSE:EW) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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 Edwards Lifesciences

What Is Edwards Lifesciences's Net Debt?

As you can see below, Edwards Lifesciences had US$596.0m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$1.52b in cash, so it actually has US$919.8m net cash.

How Healthy Is Edwards Lifesciences' Balance Sheet?

According to the last reported balance sheet, Edwards Lifesciences had liabilities of US$969.1m due within 12 months, and liabilities of US$1.51b due beyond 12 months. Offsetting these obligations, it had cash of US$1.52b as well as receivables valued at US$679.2m due within 12 months. So it has liabilities totalling US$286.5m 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 it's very unlikely that the US$52.8b company is short on cash, but still worth keeping an eye on the 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.

Fortunately, Edwards Lifesciences grew its EBIT by 6.6% 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 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Edwards Lifesciences 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, Edwards Lifesciences recorded free cash flow worth 73% 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

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$919.8m. And it impressed us with free cash flow of US$1.3b, being 73% of its EBIT. So is Edwards Lifesciences'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Edwards Lifesciences that you should be aware of before investing here.

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.