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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Anthem, Inc. (NYSE:ANTM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Anthem's Net Debt?
As you can see below, Anthem had US$19.9b of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have US$24.7b in cash offsetting this, leading to net cash of US$4.85b.
A Look At Anthem's Liabilities
The latest balance sheet data shows that Anthem had liabilities of US$23.1b due within a year, and liabilities of US$22.0b falling due after that. On the other hand, it had cash of US$24.7b and US$10.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$10.1b.
Given Anthem has a humongous market capitalization of US$76.7b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Anthem boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Anthem grew its EBIT by 5.0% in the last year, making that debt load look even more manageable. 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 Anthem 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. Anthem 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 most recent three years, Anthem recorded free cash flow worth 57% 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.
While Anthem does have more liabilities than liquid assets, it also has net cash of US$4.8b. So we don't have any problem with Anthem's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Anthem insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.