EDP ​​- Energias de Portugal (ELI:EDP) Using Debt Could Be Considered Risky

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. 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 can see that EDP ​​- Energias de Portugal, S.A. (ELI:EDP) uses debt in its business. But the more important question is: what risk does this debt create?

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for EDP – Energias de Portugal

What is EDP – Energias de Portugal’s debt?

As you can see below, EDP – Energias de Portugal had 17.3 billion euros in debt, as of December 2021, which is about the same as the previous year. You can click on the graph for more details. On the other hand, it has €3.24 billion in cash, resulting in a net debt of around €14.1 billion.

ENXTLS: EDP Debt to Equity History May 3, 2022

A look at EDP – Liabilities of Energias de Portugal

The latest balance sheet data shows that EDP – Energias de Portugal had liabilities of €11.6 billion due within one year, and liabilities of €25.4 billion falling due thereafter. . On the other hand, it had 3.24 billion euros in cash and 6.42 billion euros in receivables at less than one year. It therefore has liabilities totaling 27.4 billion euros more than its cash and short-term receivables, combined.

This deficit casts a shadow over the 17.2 billion euro company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. Ultimately, EDP – Energias de Portugal would likely need a significant recapitalization if its creditors demanded repayment.

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 depreciation and amortization charges.

EDP ​​- Energias de Portugal has a fairly high debt to EBITDA ratio of 5.2, which suggests significant leverage. But the good news is that it has a pretty comforting 2.8x interest coverage, suggesting it can meet its obligations responsibly. Another concern for investors could be that EDP – Energias de Portugal’s EBIT fell by 12% last year. If things continue like this, dealing with debt will be about as easy as putting an angry house cat in its travel box. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether EDP – Energias de Portugal can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cold hard cash, not with book profits. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the last three years, EDP – Energias de Portugal has recorded substantial negative free cash flow, in total. While this may be the result of spending for growth, it makes debt much riskier.

Our point of view

At first glance, the level of EDP – Energias de Portugal’s total liabilities left us hesitant about the stock, and its EBIT to free cash flow conversion was no more appealing than the single empty restaurant on the darkest night. busy year. Moreover, its EBIT growth rate also fails to inspire confidence. It should also be noted that companies in the electric utility sector like EDP – Energias de Portugal generally use debt without problems. We believe that the chances of EDP – Energias de Portugal having too much debt are very high. For us, this means that the action is rather high risk, and probably to be avoided; but everyone has their own (investment) style. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, EDP – Energias de Portugal has 4 warning signs (and 2 that are a bit nasty) that we think you should know about.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.

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.

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