Molina Healthcare (NYSE:MOH) Could Easily Take On More Debt

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.' 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 Molina Healthcare, Inc. (NYSE:MOH) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Molina Healthcare

How Much Debt Does Molina Healthcare Carry?

The chart below, which you can click on for greater detail, shows that Molina Healthcare had US$2.18b in debt in September 2022; about the same as the year before. However, it does have US$7.88b in cash offsetting this, leading to net cash of US$5.71b.

How Healthy Is Molina Healthcare's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Molina Healthcare had liabilities of US$7.24b due within 12 months and liabilities of US$2.51b due beyond that. Offsetting these obligations, it had cash of US$7.88b as well as receivables valued at US$2.22b due within 12 months. So it actually has US$349.0m more liquid assets than total liabilities.

This state of affairs indicates that Molina Healthcare's 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$17.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Molina Healthcare boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Molina Healthcare grew its EBIT by 65% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Molina Healthcare 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 Molina Healthcare 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 last three years, Molina Healthcare actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Molina Healthcare has net cash of US$5.71b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$1.5b, being 143% of its EBIT. So we don't think Molina Healthcare's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Molina Healthcare , and understanding them should be part of your investment process.

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.