Here’s why Entergy (NYSE: ETR) is weighed down by debt

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent 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 can see that Entregie Company (NYSE: ETR) uses debt in its business. But should shareholders be concerned about its use of debt?

What risk does debt entail?

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. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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.

What is Entergy’s net debt?

You can click on the graph below for historical figures, but it shows that as of September 2021, Entergy had a debt of US $ 25.6 billion, an increase from US $ 22.1 billion, over a year. However, given that it has a cash reserve of US $ 1.00 billion, its net debt is less, at around US $ 24.6 billion.

NYSE: ETR Debt to Equity History December 10, 2021

How healthy is Entergy’s track record?

The latest balance sheet data shows that Entergy had liabilities of US $ 6.64 billion due within one year, and liabilities of US $ 40.7 billion due thereafter. On the other hand, he had $ 1.00 billion in cash and $ 1.53 billion in receivables within a year. Its liabilities are therefore $ 44.8 billion more than the combination of its cash and short-term receivables.

The lack here weighs heavily on the $ 21.4 billion business itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. . We therefore believe that shareholders should monitor it closely. Ultimately, Entergy would likely need a major recapitalization if its creditors demanded repayment.

We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). Thus, we look at debt versus earnings with and without amortization expenses.

With a net debt to EBITDA ratio of 6.0, it’s fair to say that Entergy has significant debt. But the good news is that he enjoys a comforting enough 5.6x interest coverage, which suggests he can meet his obligations responsibly. If Entergy can continue to increase its EBIT at the rate of 13% last year compared to last year, then its debt will be more manageable. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Entergy’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals are thinking, you might find this free report on analysts’ earnings forecasts Be interesting.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Entergy has spent a lot of money. While this may be the result of spending for growth, it makes debt much riskier.

Our point of view

To be frank, Entergy’s conversion of EBIT to free cash flow and its track record of controlling its total liabilities makes us rather uncomfortable with its debt levels. But at least it’s decent enough to increase your EBIT; it’s encouraging. It’s also worth noting that electric utility companies like Entergy generally use debt with no problem. Overall, it seems to us that Entergy’s balance sheet is really very risky for the company. For this reason, we are fairly cautious about the stock, and we believe shareholders should keep a close eye on its liquidity. 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. For example, we have identified 3 warning signs for Entergy (1 makes us a little uncomfortable) you must be aware.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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