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Is Centene Corporation's (NYSE:CNC) Balance Sheet Strong Enough To Weather A Storm?

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Investors pursuing a solid, dependable stock investment can often be led to Centene Corporation (NYSE:CNC), a large-cap worth US$23b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to their continued success lies in its financial health. Today we will look at Centene’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CNC here.

View our latest analysis for Centene

Does CNC Produce Much Cash Relative To Its Debt?

Over the past year, CNC has ramped up its debt from US$5.3b to US$7.6b , which accounts for long term debt. With this growth in debt, CNC's cash and short-term investments stands at US$7.0b , ready to be used for running the business. On top of this, CNC has produced cash from operations of US$704m during the same period of time, resulting in an operating cash to total debt ratio of 9.2%, signalling that CNC’s current level of operating cash is not high enough to cover debt.

Does CNC’s liquid assets cover its short-term commitments?

Looking at CNC’s US$13b in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$14b, with a current ratio of 1.04x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Healthcare companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:CNC Historical Debt, May 11th 2019
NYSE:CNC Historical Debt, May 11th 2019

Does CNC face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 65%, CNC can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can check to see whether CNC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For CNC, the ratio of 6.23x suggests that interest is well-covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes CNC and other large-cap investments thought to be safe.

Next Steps:

CNC’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. Keep in mind I haven't considered other factors such as how CNC has been performing in the past. You should continue to research Centene to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CNC’s future growth? Take a look at our free research report of analyst consensus for CNC’s outlook.

  2. Valuation: What is CNC worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CNC is currently mispriced by the market.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

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