Elevance Health (NYSE:ELV) appears to be more conservative with debt

Warren Buffett famously said, “Volatility is far from synonymous with risk.” When we think about how risky a company is, we always look at its use of debt, because over-leveraging can lead to ruin. We take note of that Elevance Health, Inc. (NYSE:ELV) has debt on its balance sheet. But should shareholders be concerned about the use of debt?

When is debt dangerous?

Debt helps a business until the business has difficulty paying it off, whether with new capital or free cash flow. If the company can’t meet its legal obligations to pay down debt, shareholders could end up with nothing. However, it is more common (but still costly) for a company to have to issue shares at bargain prices, resulting in permanent shareholder dilution, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first consider cash and debt together.

Check out our latest analysis for Elevance Health

How much is Elevance Health’s net debt?

The image below, which you can click on for more details, shows that Elevance Health had $27.1 billion in debt as of September 2024, up from $24.8 billion in one year. However, this is offset by $37.9 billion in cash, resulting in net cash of $10.8 billion.

How strong is Elevance Health’s balance sheet?

The most recent balance sheet showed that Elevance Health had liabilities of US$42.0 billion due within a year, and liabilities of US$30.6 billion due beyond that. Offsetting this, it had US$37.9 billion in cash and US$18.4 billion in receivables that were due within 12 months. So its liabilities total US$16.3b more than its cash and short-term receivables combined.

Since Elevance Health’s publicly traded shares have an impressive total value of $94.4 billion, this level of liabilities is unlikely to pose much of a threat. However, we believe it is worth keeping an eye on balance sheet strength, as it can change over time. Although there are liabilities worth noting, Elevance Health also has more cash than debt, so we’re fairly confident that the company can manage its debt safely.

Another good sign is that Elevance Health grew its EBIT by 21% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when analyzing debt. Ultimately, however, the company’s future profitability will determine whether Elevance Health can strengthen its balance sheet over time. So if you’re focused on the future, you can look at that free Report with analyst profit forecasts.

After all, a company needs free cash flow to pay off debt; Book profits are simply not enough. Although Elevance Health does have net cash on the balance sheet, it’s still worth taking a look at the company’s ability to convert earnings before interest and tax (EBIT) to free cash flow to understand how quickly the company is building that cash (or eroded). Balance. Over the last three years, Elevance Health recorded free cash flow worth 69% of its EBIT, which is about normal considering that free cash flow excludes interest and taxes. That ready cash means it can pay down its debt whenever it wants.

In summary

Although Elevance Health has more liabilities than cash, the company also has net cash of $10.8 billion. And we liked last year’s EBIT growth of 21% year over year. Therefore, we don’t think Elevance Health’s use of debt is risky. There is no doubt that the balance sheet is where we learn the most about debt. However, not all investment risks lie on the balance sheet – quite the opposite. For example – Elevance Health has 2 warning signs We think you should be aware of this.

Ultimately, it’s often better to focus on companies that are free of net debt. You can access our special list of such companies (all with a track record of growing profits). It’s free.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.