Volatility is not a danger that we are concerned about, as David Iben succinctly stated it. Avoiding the loss of capital permanently is what matters to us. Therefore, it would appear that the smart money understands the importance of debt, which is frequently a role in bankruptcies, in determining how dangerous a company is. We observe that Humana Inc. (NYSE:HUM)’s balance sheet does show debt. But do investors have any concerns about this debt?
Debt can help businesses expand, but if a company is unable to repay its lenders, it is at their mercy. Investors may end up with nothing if the corporation is unable to meet its legal duties to pay back loans. Indebted corporations frequently permanently dilution shareholders because lenders force them to borrow capital at a distressed price, even if that is not very usual. The advantage of debt is that it frequently offers inexpensive capital, especially when it eliminates dilution in a company and allows for high rates of return on reinvestment. Examining a company’s cash and debt levels jointly is the first step in determining its debt levels.
The figure below, which you can click for more information, demonstrates that Humana had US$12.2 billion in debt at the end of June 2023, down from US$13.2 billion over the previous year. However, according to its balance sheet, it has US$31.5 billion in cash, making its true cash position US$19.3 billion.
The most current balance statement reveals that Humana has liabilities of US$28.3 billion that were due within a year and US$11.3 billion that were due after that. It has US$31.5 billion in cash on hand as well as US$1.43 billion in receivables that were due in the next year to offset these liabilities. Therefore, its liabilities amount US$6.67 billion, which is greater than its cash and short-term receivables put together.
Given Humana’s enormous market value of US$61.7 billion, it is unlikely that these liabilities pose a significant risk. Having said that, it is obvious that we should keep an eye on its balance sheet in case things worsen. Humana has net cash, thus it’s safe to conclude it does not have a significant debt load despite its notable obligations.
The good news is that Humana’s EBIT has improved by 6.3% over the past year, allaying any worries regarding debt repayment. When assessing debt, it is obvious where to concentrate your attention: the balance sheet. But more than anything else, future earnings will determine Humana’s ability to keep a sound balance sheet moving ahead. To learn more about analyst profit estimates, get this free research if you’re interested in the future.
Finally, lenders only accept actual cash, despite the fact that the taxman loves accounting gains. Despite having net cash on its balance sheet, Humana’s ability to effectively convert earnings before interest and taxes (EBIT) into free cash flow will have an impact on both the amount of debt the company has to manage and the necessity for debt in the first place. Fortunately for any shareholders, over the past three years, Humana has actually generated more free cash flow than EBIT. When it comes to keeping your lenders happy, nothing is better than receiving cash.
Despite the fact that Humana’s balance sheet isn’t very robust due to its overall liabilities, it is encouraging to see that it has US$19.3 billion in net cash. Additionally, it wowed us with free cash flow of $12 billion, which was 116% of its EBIT. So, in our opinion, Humana’s use of debt is not dangerous. If insiders have been purchasing shares, that is another indicator that would boost our confidence in Humana. If you are aware of that indication as well.