Does EnBW Energie Baden-Württemberg (ETR:EBK) have a healthy balance sheet?
Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that EnBW Energie Baden-Württemberg AG (ETR:EBK) has debt on its balance sheet. But should shareholders worry about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Check out our latest analysis for EnBW Energie Baden-Württemberg
What is EnBW Energie Baden-Württemberg’s net debt?
You can click on the graph below for historical figures, but it shows that in March 2022, EnBW Energie Baden-Württemberg had a debt of 14.5 billion euros, an increase from 10.7 billion euros. euros, over one year. However, since it has a cash reserve of 9.91 billion euros, its net debt is less, at around 4.58 billion euros.
How strong is EnBW Energie Baden-Württemberg’s balance sheet?
According to the last published balance sheet, EnBW Energie Baden-Württemberg had liabilities of 44.0 billion euros at less than 12 months and liabilities of 27.9 billion euros at more than 12 months. In return, it had 9.91 billion euros in cash and 8.40 billion euros in receivables due within 12 months. Thus, its liabilities total 53.5 billion euros more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the 24.1 billion euro business itself, like a child struggling under the weight of a huge backpack full of books, his sports equipment and a trumpet. So we definitely think shareholders need to watch this one closely. After all, EnBW Energie Baden-Württemberg would probably need a major recapitalization if it had to pay its creditors today.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). Thus, we consider debt to earnings with and without amortization and depreciation expense.
The ratio of net debt to EBITDA of EnBW Energie Baden-Württemberg of approximately 1.5 suggests only moderate recourse to debt. And its strong interest coverage of 36.5 times makes us even more comfortable. Furthermore, we are pleased to report that EnBW Energie Baden-Württemberg increased its EBIT by 35%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; because EnBW Energie Baden-Württemberg will need income to service this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, a company can only repay its debts with cold hard cash, not with book profits. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, EnBW Energie Baden-Württemberg has recorded free cash flow of 79% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.
Our point of view
Based on what we have seen, EnBW Energie Baden-Württemberg does not have it easy given its level of total liabilities, but the other factors we have taken into account give us cause for optimism. In particular, we are dazzled by its interest coverage. It should also be noted that EnBW Energie Baden-Württemberg is in the electrical utility industry, which is often seen as quite defensive. Given this range of data points, we believe that EnBW Energie Baden-Württemberg is in a good position to manage its level of indebtedness. That said, the charge is heavy enough that we recommend that any shareholder keep a close eye on it. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 3 warning signs with EnBW Energie Baden-Württemberg, and understanding them should be part of your investment process.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.