Li Lu, an external fund manager backed by Berkshire Hathaway’s Charlie Munger, says, “The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.” It has even been stated. In other words, financially smart people seem to know that debt (usually associated with bankruptcy) is a very important factor when assessing a company’s risk.Like many other companies duke energy corporation (New York Stock Exchange: Duke) use debt. But should shareholders be worried about its use of debt?
When is debt a problem?
Debt supports a company until the company has difficulty paying it back with new capital or free cash flow. Ultimately, if a company fails to meet its legal obligations to repay debt, shareholders could walk away with nothing. But a more common (but still expensive) situation is when a company needs to dilute shareholders at a cheap share price just to manage its debt. Having said that, the most common situation is one in which a company manages its debt reasonably well and to its own advantage. The first thing to do when considering how much debt a company uses is to look at its cash and debt together.
Check out our latest analysis for Duke Energy.
How much debt does Duke Energy have?
The image below, which you can click on for greater detail, shows that Duke Energy had debt of US$78.0b at June 2023, up from US$70.2b in one year. They also don’t have as much cash, so their net debt is about the same.
How healthy is Duke Energy’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Duke Energy had debt of US$17.4b falling due within 12 months, and debt of US$111.6b falling due beyond that. Masu. On the other hand, it had cash of US$507m and receivables worth US$3.83b that were due within a year. So it has liabilities of US$124.7b more than its cash and short-term receivables, combined.
The deficit casts a shadow over the $68 billion company like a colossus towering over the average person. So we definitely think shareholders need to monitor this closely. After all, if creditors demand repayment, Duke Energy will likely need a major recapitalization.
We use two main ratios to determine debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), and the second is how much earnings before interest and tax (EBIT) covers interest expense (or interest cover, for short). It’s about how many times you cover it. . Therefore, we consider debt relative to earnings, with or without depreciation.
Weak interest coverage of 2.5x and disturbingly high net debt-to-EBITDA ratio of 6.2 shattered our confidence in Duke Energy like a one-two punch to the gut. This means that you are likely to be in a lot of debt. Fortunately, Duke Energy grew its EBIT by 8.1% over the last year, gradually shrinking its debt relative to profit. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, Duke Energy’s ability to strengthen its balance sheet over the long term will depend on the future profitability of its business. Want to know what experts think? This free report on analyst profit forecasts To be interesting.
Finally, companies can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of his EBIT that is matched by actual free cash flow. Over the past three years, Duke Energy’s total free cash flow has been significantly negative. While this may be a result of spending for growth, it is true that debt is much more risky.
our view
On the surface, Duke Energy’s conversion of EBIT to free cash flow makes us nervous about this stock, and its total debt level is one of the most unoccupied houses on the busiest night of the year. It wasn’t as inviting as the restaurant. But on the bright side, the EBIT growth rate is a good sign and makes us more optimistic. It’s also worth noting that Duke Energy is in the electric utility industry, which is considered to be very defensive. After considering the data points discussed, we believe Duke Energy has too much debt. Some investors like such risky strategies, but it is not our preference. When analyzing debt levels, the balance sheet is the obvious place to start. Ultimately, however, any company can contain risks that exist outside the balance sheet. We’ve identified 2 warning signs for you With Duke Energy (at least one that can’t be ignored) And understanding them should be part of the investment process.
Of course, if you’re the type of investor who wants to buy stocks without taking on debt, don’t hesitate to find one. Exclusive list of net cash growth stockstoday.
Have feedback on this article? Curious about its content? contact Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
