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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Elevance Health, Inc. (NYSE:ELV) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Elevance Health's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Elevance Health had US$30.4b of debt, an increase on US$25.1b, over one year. However, its balance sheet shows it holds US$36.0b in cash, so it actually has US$5.61b net cash.

How Healthy Is Elevance Health's Balance Sheet?

We can see from the most recent balance sheet that Elevance Health had liabilities of US$41.8b falling due within a year, and liabilities of US$28.9b due beyond that. Offsetting these obligations, it had cash of US$36.0b as well as receivables valued at US$19.3b due within 12 months. So its liabilities total US$15.4b more than the combination of its cash and short-term receivables.

Given Elevance Health has a humongous market capitalization of US$127.7b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Elevance Health also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Elevance Health grew its EBIT at 14% over the last year, further increasing its ability to manage 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 Elevance Health 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Elevance Health 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 most recent three years, Elevance Health recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Elevance Health's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$5.61b. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in US$820m. So is Elevance Health's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Elevance Health 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.

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.