When it comes to evaluating investment risks, the notion of volatility is often considered alongside debt. However, legendary investor Warren Buffett challenges this belief by stating that “Volatility is far from synonymous with risk.” While debt undoubtedly plays a role in assessing the risk associated with a company, it is crucial to delve deeper into other factors that contribute to the overall risk profile.
Essential Utilities, Inc. (NYSE:WTRG), a prominent player in the Water Utilities industry, carries a significant amount of debt. With the current emphasis on debt levels, investors must question whether this debt truly poses a risk to the company.
Debt can be advantageous for a business until it becomes challenging to repay. In dire situations, lenders can take control of the company, leading to potential collapse. However, the more common scenario is when a company is forced to dilute shareholders by issuing cheap shares to manage its debt. On the flip side, debt can provide access to cheap capital, especially when it replaces dilution and allows a company to reinvest at high rates of return.
Analyzing Essential Utilities’ debt levels requires consideration of both cash and debt together. As of September 2023, the company had a total debt of US$6.83 billion, constituting an increase from US$6.55 billion in the previous year. Additionally, its cash reserves are relatively low, resulting in net debt that remains consistent.
When examining the company’s liabilities, Essential Utilities reported US$896.6 million in liabilities due within 12 months and US$9.61 billion due beyond that period. Meanwhile, it holds US$8.51 million in cash and US$208.8 million in receivables due within a year. Consequently, the company’s liabilities exceed its cash and receivables by a substantial US$10.3 billion, surpassing its market capitalization of US$9.66 billion.
To assess the impact of debt on earnings, two ratios are often utilized: net debt to earnings before interest, tax, depreciation, and amortization (EBITDA) and the coverage of interest expenses by earnings before interest and tax (EBIT). Essential Utilities exhibits a relatively high debt to EBITDA ratio of 6.6, indicating a significant debt burden. However, the company maintains a comforting interest cover of 2.5 times, suggesting its ability to responsibly service its obligations.
While Essential Utilities has seen a 6.9% improvement in EBIT over the past year, reducing its debt levels relative to earnings, the focus remains on future earnings. It is crucial to evaluate the company’s capability to maintain a healthy balance sheet going forward. By referring to analyst profit forecasts, investors can gain insight into Essential Utilities’ future performance.
In conclusion, Essential Utilities’ balance sheet presents significant risks to the business due to its high net debt to EBITDA ratio and historical cash burn. Coupled with the unique challenges of the Water Utilities industry, caution is necessary when considering an investment in this company. Evaluating risk solely based on debt levels is insufficient; investors should also be mindful of other factors that may impact long-term sustainability and growth prospects.
Frequently Asked Questions (FAQ)
- What is the debt level of Essential Utilities, Inc.?
- Does Essential Utilities have sufficient cash to cover its liabilities?
- How does Essential Utilities’ debt impact its earnings?
- Has Essential Utilities shown improvement in reducing its debt levels?
- What factors should investors consider when analyzing Essential Utilities?
As of September 2023, Essential Utilities had a total debt of US$6.83 billion.
Essential Utilities has relatively low cash reserves, resulting in a net debt that equals its total debt.
Essential Utilities exhibits a high debt to EBITDA ratio of 6.6, implying a significant debt burden. However, the company maintains a comforting interest cover of 2.5 times.
Essential Utilities has recorded a 6.9% improvement in EBIT over the last twelve months, indicating progress in reducing its debt relative to earnings.
While debt is a significant consideration, investors should also evaluate the company’s future earnings prospects and potential risks within the Water Utilities industry.