Is Humana (NYSE:HUM) A Risky Investment?

Li Lu is an external fund manager that Berkshire Hathaway’s Charlie Munger has backed. He says, “The greatest investment risk in investing is not volatility of prices but whether or not you will suffer a loss of capital.” It might seem obvious that debt should be considered when assessing the risk of any stock. Too much debt can lead to a company’s collapse. Importantly, Humana Inc. (NYSE:HUM() has debt. Should shareholders be worried about its debt use?

Why does debt bring risk?

When a company cannot pay its debts or other obligations on time, it can become risky. Lenders can take over a business if things go terribly. The most common (but still costly) scenario is one where the company must dilute shareholders at low share prices to control its debt. Businesses that require capital to grow at high rates can use debt to replace dilution. It is important to evaluate how much debt a company uses.

See our latest analysis for Humana

What is Humana’s debt?

Humana’s debt as of September 2022 was US$10.8b. This is down from US$12.5b last year. This is offset by US$26.7b of cash, which results in net cash of US$15.8b.

How Strong is Humana’s Balance Sheet?

If we zoom in on the most recent balance sheet data, it is clear that Humana had liabilities that totaled US$25.1b that were due within 12 months and liabilities that totaled US$9.40b beyond that. However, the company had cash of US$26.7b as well as US$1.61b of receivables that were due within a year. The sum of its cash and receivables (near-term), exceeds its liabilities by US$6.16b.

It seems unlikely that such high levels of liabilities could pose a threat to publicly traded Humana shares, which are valued at US$61.8b. We do recommend that you keep an eye on the strength of its balance sheet, as it could change over time. Humana does have some liabilities, but we believe it is able to manage its loans safely.

Humana saw its EBIT increase by 3.9% in the past year. This makes it easier to manage that debt load. When analysing debt, the balance sheet should be your main focus. Humana’s ability and willingness to keep a healthy balance will depend on future earnings. You might be interested in what professionals have to say. this free report on analyst profit forecasts to be fascinating.

A business requires free cash flow to pay down its debt. Accounting profits won’t cut it. Humana’s net cash balance is not a problem, but it’s worth taking a look at the company’s ability to convert earnings after interest and tax (EBIT), into free cash flow. This will help us see how quickly it is building up (or decreasing) its cash balance. Humana has produced more free cash flow over the past three years than EBIT, which is a good thing for shareholders. This kind of strong cash generation is like a puppy wearing a bumblebee suit.

Summarising

It is always a good idea to examine a company’s total assets, but it is very comforting that Humana has US$15.8b of net cash. It also impressed us with its free cash flow of US$8.4b which is 108% of its EBIT. Is Humana’s debt a danger? It doesn’t appear so to us. The balance sheet is where we learn the most about debt. But, the balance sheet doesn’t contain all investment risk. Far from it. These risks can be difficult to spot. They are a part of every company, and they’re all easy to spot. 1 warning sign for Humana You should be aware of these things.

It’s better to look at companies that have no net debt. There are many resources available to help you access your finances. our special list of such companies All of them have a track record for profit growth. It’s free.

Let us know what you think about this article. Are you concerned about the content? Get in touch Get in touch with us. Alternatively, email editorial-team (at) simplywallst.com.

This article is by Simply Wall St. It is general in nature. Our commentary is based only on historical data and analyst projections. It is not a recommendation not to buy or sell any stocks and does not take into account your financial situation or objectives. Our goal is to provide you with long-term, focused analysis based on fundamental data. Please note that our analysis might not include the most recent announcements from price-sensitive companies or qualitative material. Simply Wall St does not hold any position in the stocks mentioned.

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