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

Warren Buffett famously said, '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. As with many other companies Molina Healthcare, Inc. (NYSE:MOH) makes use of debt. But the more important question is: how much risk is that debt creating?

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 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, 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.

See 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 March 2023; about the same as the year before. But it also has US$8.36b in cash to offset that, meaning it has US$6.19b net cash.

How Strong Is Molina Healthcare's Balance Sheet?

The latest balance sheet data shows that Molina Healthcare had liabilities of US$7.61b due within a year, and liabilities of US$2.47b falling due after that. On the other hand, it had cash of US$8.36b and US$2.54b worth of receivables due within a year. So it can boast US$817.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Molina Healthcare could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Molina Healthcare has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Molina Healthcare has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Molina Healthcare 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, Molina Healthcare actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Molina Healthcare has US$6.19b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 149% of that EBIT to free cash flow, bringing in US$1.2b. The bottom line is that we do not find Molina Healthcare's debt levels at all concerning. Another factor that would give us confidence in Molina Healthcare 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.