Humana (NYSE:HUM) Seems To Use Debt Quite Sensibly

editorial-team@simplywallst.com (Simply Wall St)

Mon, Dec 30, 2024, 4:00 AM 4 min read

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Humana Inc. (NYSE:HUM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Humana

How Much Debt Does Humana Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Humana had debt of US$13.4b, up from US$12.0b in one year. But it also has US$24.1b in cash to offset that, meaning it has US$10.8b net cash.

debt-equity-history-analysis — NYSE:HUM Debt to Equity History December 30th 2024

How Healthy Is Humana's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Humana had liabilities of US$18.7b due within 12 months and liabilities of US$13.7b due beyond that. Offsetting these obligations, it had cash of US$24.1b as well as receivables valued at US$2.14b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.09b.

Since publicly traded Humana shares are worth a very impressive total of US$30.8b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Humana boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Humana's EBIT fell a jaw-dropping 31% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Humana 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Humana 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, Humana produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Humana'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$10.8b. And it impressed us with free cash flow of -US$4.3b, being 74% of its EBIT. So we don't have any problem with Humana's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Humana 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.