Is Edwards Lifesciences (NYSE:EW) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Edwards Lifesciences Corporation (NYSE:EW) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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$596.2m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.74b in cash to offset that, meaning it has US$1.14b net cash.

A Look At Edwards Lifesciences' Liabilities

The latest balance sheet data shows that Edwards Lifesciences had liabilities of US$917.9m due within a year, and liabilities of US$1.50b falling due after that. Offsetting this, it had US$1.74b in cash and US$661.4m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Edwards Lifesciences' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$45.5b 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.

The good news is that Edwards Lifesciences has increased its EBIT by 7.7% over twelve months, which should ease any concerns about debt repayment. 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 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. 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 68% 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$1.14b. And it impressed us with free cash flow of US$1.0b, being 68% of its EBIT. So we don't think Edwards Lifesciences's use of debt is risky. Another factor that would give us confidence in Edwards Lifesciences would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.