David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We note that Dominion Energy, Inc. (NYSE: D) has debt on its balance sheet. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for Dominion Energy
What is Dominion Energy’s net debt?
The graph below, which you can click for more details, shows that Dominion Energy had $ 39.8 billion in debt as of June 2021; about the same as the year before. Net debt is about the same because it doesn’t have a lot of cash.
How strong is Dominion Energy’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Dominion Energy had a liability of US $ 11.7 billion due within 12 months and a liability of US $ 59.4 billion beyond. In return, he had $ 240.0 million in cash and $ 1.98 billion in receivables due within 12 months. It therefore has liabilities totaling $ 68.9 billion more than its cash and short-term receivables combined.
Given that this deficit is actually greater than the company’s massive market cap of $ 61.9 billion, we think shareholders should really watch Dominion Energy’s debt levels, like a parent watching their child. riding a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely that shareholders would suffer a significant dilution.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
With a net debt to EBITDA ratio of 6.3, it’s fair to say that Dominion Energy has significant debt. But the good news is that he enjoys quite a comforting 2.5x interest coverage, which suggests he can meet his obligations responsibly. Worse yet, Dominion Energy’s EBIT was down 22% from last year. If profits continue to follow this path, it will be more difficult to pay off this debt than to convince us to run a marathon in the rain. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Dominion Energy can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only repay its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Dominion Energy has experienced total negative free cash flow. Debt is much riskier for companies with unreliable free cash flow, so shareholders should hope that past spending will produce free cash flow in the future.
Our point of view
To be frank, Dominion Energy’s net debt to EBITDA and its history of (not) growing EBIT makes us rather uncomfortable with its debt levels. And what’s more, his interest coverage fails to inspire confidence either. It should also be noted that companies in the integrated utility sector like Dominion Energy generally use debt without a problem. After looking at the data points discussed, we believe Dominion Energy has too much debt. While some investors like this kind of risky game, it is certainly not our cup of tea. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. We have identified 2 warning signs with Dominion Energy (at least 1 of concern), and understanding them should be part of your investment process.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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