We Think Molina Healthcare (NYSE:MOH) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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.

Check out 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 June 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$8.80b in cash, leading to a US$6.62b net cash position.

How Strong Is Molina Healthcare's Balance Sheet?

We can see from the most recent balance sheet that Molina Healthcare had liabilities of US$7.54b falling due within a year, and liabilities of US$2.50b due beyond that. Offsetting these obligations, it had cash of US$8.80b as well as receivables valued at US$2.39b due within 12 months. So it actually has US$1.14b 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.

On top of that, Molina Healthcare grew its EBIT by 33% 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. 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$6.62b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$1.3b, being 144% of its EBIT. When it comes to Molina Healthcare's debt, we sufficiently relaxed that our mind turns to the jacuzzi. There's no doubt that we learn most about debt from the balance sheet. 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.

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.