Molina Healthcare (NYSE:MOH) Has A Rock Solid Balance Sheet

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Molina Healthcare, Inc. (NYSE:MOH) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out the opportunities and risks within the US Healthcare industry.

What Is Molina Healthcare's Debt?

The chart below, which you can click on for greater detail, shows that Molina Healthcare had US$2.18b in debt in June 2022; about the same as the year before. However, its balance sheet shows it holds US$7.88b in cash, so it actually has US$5.70b net cash.

A Look At Molina Healthcare's Liabilities

The latest balance sheet data shows that Molina Healthcare had liabilities of US$7.23b due within a year, and liabilities of US$2.52b falling due after that. Offsetting these obligations, it had cash of US$7.88b as well as receivables valued at US$2.24b due within 12 months. So it actually has US$377.0m 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 it's very unlikely that the US$21.2b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Molina Healthcare has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Molina Healthcare grew its EBIT by 39% 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 Molina Healthcare'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. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Molina Healthcare has US$5.70b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 146% of that EBIT to free cash flow, bringing in US$1.7b. So is Molina Healthcare's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Molina Healthcare is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.