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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Molina Healthcare, Inc. (NYSE:MOH) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Molina Healthcare's Debt?
The image below, which you can click on for greater detail, shows that Molina Healthcare had debt of US$1.31b at the end of June 2019, a reduction from US$1.70b over a year. But it also has US$4.32b in cash to offset that, meaning it has US$3.02b net cash.
How Healthy Is Molina Healthcare's Balance Sheet?
According to the last reported balance sheet, Molina Healthcare had liabilities of US$3.39b due within 12 months, and liabilities of US$1.57b due beyond 12 months. Offsetting this, it had US$4.32b in cash and US$1.24b in receivables that were due within 12 months. So it actually has US$608.0m more liquid assets than total liabilities.
This surplus suggests that Molina Healthcare has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Molina Healthcare boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Molina Healthcare grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Molina Healthcare'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. Molina Healthcare 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. In the last three years, Molina Healthcare's free cash flow amounted to 41% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
While it is always sensible to investigate a company's debt, in this case Molina Healthcare has US$3.0b in net cash and a decent-looking balance sheet. And we liked the look of last year's 37% year-on-year EBIT growth. So is Molina Healthcare's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Molina Healthcare 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.
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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