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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Edwards Lifesciences Corporation (NYSE:EW) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Edwards Lifesciences

What Is Edwards Lifesciences's Debt?

As you can see below, Edwards Lifesciences had US$597.5m of debt, at September 2024, 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$4.45b in cash, so it actually has US$3.85b net cash.

A Look At Edwards Lifesciences' Liabilities

According to the last reported balance sheet, Edwards Lifesciences had liabilities of US$1.94b due within 12 months, and liabilities of US$1.42b due beyond 12 months. Offsetting these obligations, it had cash of US$4.45b as well as receivables valued at US$811.5m due within 12 months. So it actually has US$1.90b more liquid assets than total liabilities.

This short term liquidity is a sign that Edwards Lifesciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Edwards Lifesciences boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Edwards Lifesciences grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Edwards Lifesciences recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Edwards Lifesciences has net cash of US$3.85b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 36% over the last year. So is Edwards Lifesciences's debt a risk? It doesn't seem so to us. We'd be very excited to see if Edwards Lifesciences insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.