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 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, Centene Corporation (NYSE:CNC) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Centene Carry?
As you can see below, at the end of June 2019, Centene had US$7.16b of debt, up from US$6.42b a year ago. Click the image for more detail. But on the other hand it also has US$7.64b in cash, leading to a US$485.0m net cash position.
A Look At Centene's Liabilities
Zooming in on the latest balance sheet data, we can see that Centene had liabilities of US$12.7b due within 12 months and liabilities of US$9.45b due beyond that. Offsetting this, it had US$7.64b in cash and US$5.18b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$9.28b.
While this might seem like a lot, it is not so bad since Centene has a huge market capitalization of US$17.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Centene boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Centene has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Centene's ability to maintain a healthy balance sheet going forward. 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. Centene 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, Centene recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Although Centene'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$485.0m. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in US$1.5b. So is Centene's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Centene's earnings per share history for free.
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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