Yahoo Finance Edwards Lifesciences (NYSE:EW) Seems To Use Debt Rather Sparingly
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Edwards Lifesciences Corporation (NYSE:EW) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Edwards Lifesciences
What Is Edwards Lifesciences's Net Debt?
As you can see below, Edwards Lifesciences had US$597.3m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$1.99b in cash, so it actually has US$1.39b net cash.
A Look At Edwards Lifesciences' Liabilities
Zooming in on the latest balance sheet data, we can see that Edwards Lifesciences had liabilities of US$1.22b due within 12 months and liabilities of US$1.38b due beyond that. Offsetting this, it had US$1.99b in cash and US$834.4m in receivables that were due within 12 months. So it can boast US$229.5m more liquid assets than total liabilities.
Having regard to Edwards Lifesciences' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$36.6b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Edwards Lifesciences has more cash than debt is arguably a good indication that it can manage its debt safely.
Another good sign is that Edwards Lifesciences has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Edwards Lifesciences'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Edwards Lifesciences 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. Looking at the most recent three years, Edwards Lifesciences recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Edwards Lifesciences has net cash of US$1.39b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 26% over the last year. So is Edwards Lifesciences's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Edwards Lifesciences 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.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
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