Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” 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. We can see that Alliant energy company (NASDAQ: LNT) uses debt in his business. But the most 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 repay it easily, 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. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
What is Alliant Energy’s debt?
The image below, which you can click for more details, shows that as of December 2020, Alliant Energy was in debt of $ 7.17 billion, up from $ 6.53 billion in one year. Net debt is about the same because it doesn’t have a lot of cash.
How healthy is Alliant Energy’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Alliant Energy had US $ 1.30 billion in liabilities due within 12 months and US $ 10.5 billion in liabilities due beyond. In compensation for these obligations, it had cash of US $ 54.0 million as well as receivables valued at US $ 412.0 million due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 11.4 billion.
That’s a mountain of leverage, even compared to its gargantuan market cap of US $ 12.9 billion. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.
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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
With a net debt to EBITDA ratio of 5.3, it’s fair to say that Alliant Energy has significant debt. However, its 2.5 interest coverage is reasonably strong, which is a good sign. Even more troubling is the fact that Alliant Energy has actually allowed its EBIT to decline 4.0% over the past year. If it continues like this, paying off debt will be like running on a treadmill – a lot of effort for little progress. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Alliant Energy can strengthen its balance sheet over time. So if you want to see what the professionals are thinking, you might find this free report on analysts’ earnings forecasts Be interesting.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Alliant Energy has spent a lot of money. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.
Our point of view
To be frank, Alliant Energy’s net debt to EBITDA and history of converting EBIT to free cash flow makes us rather uncomfortable with its debt levels. And besides, his total passive level also fails to inspire confidence. It’s also worth noting that Alliant Energy is part of the electric utility industry, which is often seen as quite defensive. We’re pretty clear that we consider Alliant Energy to be really quite risky, because of the health of its balance sheet. For this reason, we are quite cautious on the stock, and we believe that shareholders should closely monitor its liquidity. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. We have identified 1 warning sign with Alliant Énergie , and understanding them should be part of your investment process.
Of course, if you are the kind of investor who prefers to buy stocks without going into debt, then feel free to find out. our exclusive list of cash net growth stocks, today.
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