Here's Why Edwards Lifesciences (NYSE:EW) Can Manage Its Debt Responsibly

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.' 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. Importantly, Edwards Lifesciences Corporation (NYSE:EW) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Edwards Lifesciences

What Is Edwards Lifesciences's Net Debt?

As you can see below, Edwards Lifesciences had US$596.8m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$1.86b in cash, leading to a US$1.27b net cash position.

A Look At Edwards Lifesciences' Liabilities

We can see from the most recent balance sheet that Edwards Lifesciences had liabilities of US$1.24b falling due within a year, and liabilities of US$1.40b due beyond that. On the other hand, it had cash of US$1.86b and US$802.1m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

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$44.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Edwards Lifesciences has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Edwards Lifesciences saw its EBIT decline by 7.8% over the last year. 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 ultimately the future profitability of the business will decide if Edwards Lifesciences 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 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 67% 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

While it is always sensible to investigate a company's debt, in this case Edwards Lifesciences has US$1.27b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in US$788m. So we don't think Edwards Lifesciences's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Edwards Lifesciences insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.