Does Humana (NYSE:HUM) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. We can see that Humana Inc. (NYSE:HUM) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Humana

What Is Humana's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Humana had debt of US$12.0b, up from US$10.8b in one year. However, its balance sheet shows it holds US$30.3b in cash, so it actually has US$18.3b net cash.

How Strong Is Humana's Balance Sheet?

We can see from the most recent balance sheet that Humana had liabilities of US$27.8b falling due within a year, and liabilities of US$11.1b due beyond that. On the other hand, it had cash of US$30.3b and US$1.82b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.78b.

Given Humana has a humongous market capitalization of US$59.3b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Humana also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Humana has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Humana'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. Humana 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 last three years, Humana actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Humana does have more liabilities than liquid assets, it also has net cash of US$18.3b. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in US$5.0b. So we don't think Humana's use of debt is risky. Another factor that would give us confidence in Humana 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.