Electricité de France (EPA: EDF) is it too indebted?
Howard Marks put 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 every investor practice that I know is worried. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Above all, Electricité de France SA (EPA: EDF) carries the debt. But does this debt worry shareholders?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first look at cash and debt levels, together.
See our latest analysis for Electricité de France
What is the debt of Electricité de France?
You can click on the graph below for historical figures, but it shows that Electricité de France had € 57.2 billion in debt in June 2021, up from € 73.3 billion a year earlier. On the other hand, it has 27.5 billion euros in liquidity leading to a net debt of around 29.7 billion euros.
Is Electricité de France’s balance sheet healthy?
Zooming in on the latest balance sheet data, we see that Electricité de France had a liability of 61.2 billion euros at 12 months and a liability of 193.2 billion euros beyond. On the other hand, it had cash of € 27.5 billion and € 26.6 billion in receivables within one year. It therefore has total liabilities of 200.3 billion euros more than its combined cash and short-term receivables.
This deficit casts a shadow over the 40.0 billion euro company, like a colossus towering over mere mortals. We would therefore monitor its record closely, without a doubt. In the end, Electricité de France would probably need a major recapitalization if its creditors demanded repayment.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we consider debt versus earnings with and without amortization expenses.
Electricité de France’s net debt to EBITDA ratio of around 1.8 suggests only moderate recourse to debt. And its strong 16.6-fold coverage interest makes us even more comfortable. Above all, Electricité de France has increased its EBIT by 35% over the past twelve months, and this growth will make it easier to process its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is ultimately the company’s future profitability that will decide whether Électricité de France will be able to 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 needs free cash flow to repay its debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Électricité de France has experienced significant negative free cash flow overall. While this may be the result of spending for growth, it makes debt much riskier.
Our point of view
At first glance, the conversion of Electricité de France’s EBIT into free cash flow left us hesitant about the stock, and its total liability level was no more enticing than the only restaurant that was empty on the busiest night. of the year. But at least it’s decent enough to cover its interest costs with its EBIT; it’s encouraging. It should also be noted that companies in the Electric Utilities sector such as Électricité de France currently use debt without any problem. Once you consider all of the above factors together, it seems to us that Electricité de France’s debt makes it a bit risky. Some people like this kind of risk, but we are aware of the potential pitfalls, so we would probably prefer him to carry less debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 3 warning signs for Electricité de France which you should know before investing here.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow-growing stocks.
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 documents. Simply Wall St has no position in any of the stocks mentioned.
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