Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Edwards Lifesciences

How Much Debt Does Edwards Lifesciences Carry?

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

According to the last reported balance sheet, Edwards Lifesciences had liabilities of US$1.22b due within 12 months, and liabilities of US$1.38b due beyond 12 months. Offsetting these obligations, it had cash of US$1.99b as well as receivables valued at US$834.4m due within 12 months. So it actually has 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 while it's hard to imagine that the US$40.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Edwards Lifesciences boasts net cash, so it's fair to say it does not have a heavy debt load!

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 ultimately the future profitability of the business will decide if Edwards Lifesciences 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. 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's not great, when it comes to paying down debt.

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 we don't think Edwards Lifesciences's use of debt is risky. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.