Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Elevance Health, Inc. (NYSE:ELV) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Elevance Health's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Elevance Health had debt of US$33.5b, up from US$27.5b in one year. However, it does have US$34.7b in cash offsetting this, leading to net cash of US$1.14b.

How Strong Is Elevance Health's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Elevance Health had liabilities of US$40.6b due within 12 months and liabilities of US$34.9b due beyond that. On the other hand, it had cash of US$34.7b and US$19.0b worth of receivables due within a year. So its liabilities total US$21.8b more than the combination of its cash and short-term receivables.

Elevance Health has a very large market capitalization of US$97.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Elevance Health boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Elevance Health

On the other hand, Elevance Health saw its EBIT drop by 7.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Elevance Health can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Elevance Health has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Elevance Health produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Elevance Health'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$1.14b. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in US$4.6b. So we are not troubled with Elevance Health's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Elevance Health is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.