Molina Healthcare (NYSE:MOH) Seems To Use Debt Rather Sparingly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Molina Healthcare, Inc. (NYSE:MOH) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Molina Healthcare

What Is Molina Healthcare's Debt?

As you can see below, Molina Healthcare had US$2.18b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$9.11b in cash offsetting this, leading to net cash of US$6.93b.

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$8.17b due within 12 months and liabilities of US$2.51b due beyond that. Offsetting this, it had US$9.11b in cash and US$3.10b in receivables that were due within 12 months. So it can boast US$1.53b more liquid assets than total liabilities.

This surplus suggests that Molina Healthcare has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Molina Healthcare has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Molina Healthcare grew its EBIT at 17% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Molina Healthcare can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Happily for any shareholders, Molina Healthcare actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Molina Healthcare has net cash of US$6.93b, as well as more liquid assets than liabilities. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in US$1.6b. 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Molina Healthcare you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.