Does CenterPoint Energy (NYSE: CNP) have a healthy balance sheet?
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. We can see that CenterPoint Energy, Inc. (NYSE: CNP) uses debt in its business. But does this debt worry shareholders?
When Is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. 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, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first consider both liquidity and debt levels.
What is the debt of CenterPoint Energy?
The image below, which you can click for more details, shows that in June 2021, CenterPoint Energy was in debt of US $ 16.2 billion, up from US $ 12.9 billion in a year. On the other hand, it has $ 1.10 billion in cash, resulting in net debt of around $ 15.1 billion.
NYSE: CNP Debt to Equity History October 23, 2021
How healthy is CenterPoint Energy’s balance sheet?
We can see from the most recent balance sheet that CenterPoint Energy had liabilities of US $ 3.37 billion maturing within one year and liabilities of US $ 24.2 billion maturing beyond that. . On the other hand, he had $ 1.10 billion in cash and $ 999.0 million in receivables due within a year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 25.5 billion.
This deficit casts a shadow over the $ 15.7 billion company like a towering colossus of mere mortals. So we would be watching its record closely, without a doubt. After all, CenterPoint Energy would likely need a major recapitalization if it were to pay its creditors today.
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.
CenterPoint Energy has a rather high debt-to-EBITDA ratio of 6.2, which suggests significant leverage. However, its interest coverage of 2.8 is reasonably strong, which is a good sign. More worryingly, CenterPoint Energy has seen its EBIT drop 3.7% over the past twelve months. If this earnings trend continues, the company will face an uphill battle to repay its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine CenterPoint Energy’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, CenterPoint Energy has experienced substantial total negative free cash flow. While this may be the result of spending on growth, it makes debt much riskier.
Our point of view
To be frank, CenterPoint Energy’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. That said, his ability to increase his EBIT is not that much of a concern. It should also be noted that CenterPoint Energy belongs to the integrated utilities sector, which is often seen as quite defensive. Considering all of the aforementioned factors, it appears that CenterPoint Energy has too much debt. While some investors like this kind of risky game, it is certainly not our cup of tea. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 3 warning signs for CenterPoint Energy (1 is concerning) you should be aware of.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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