DTE Energy (NYSE:DTE) has a somewhat stretched balance sheet
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies DTE Energy Company (NYSE:DTE) uses debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for DTE Energy
What is DTE Energy’s debt?
You can click on the chart below for historical numbers, but it shows DTE Energy had US$18.1 billion in debt in December 2021, up from US$19.5 billion a year earlier. Net debt is about the same, since she doesn’t have a lot of cash.
A Look at DTE Energy’s Liabilities
The latest balance sheet data shows that DTE Energy had liabilities of $6.35 billion due within one year, and liabilities of $24.7 billion due thereafter. In return, it had $28.0 million in cash and $1.83 billion in receivables due within 12 months. It therefore has liabilities totaling $29.1 billion more than its cash and short-term receivables, combined.
When you consider that this shortfall exceeds the company’s huge US$22.5 billion market capitalization, you might well be inclined to take a close look at the balance sheet. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
DTE Energy shareholders face the double whammy of a high net debt to EBITDA ratio (7.1) and quite low interest coverage, as EBIT is only 2.5 times expenses of interests. This means that we would consider him to be heavily indebted. Even more troubling is the fact that DTE Energy has actually let its EBIT decline by 2.0% over the past year. If this earnings trend continues, the company will face an uphill battle to pay off its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine DTE Energy’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, DTE Energy has experienced substantial negative free cash flow, in total. While this may be the result of spending for growth, it makes debt much riskier.
Our point of view
At first glance, DTE Energy’s net debt to EBITDA ratio left us hesitant about the stock, and its EBIT-to-free-cash-flow conversion was no more appealing than the one empty restaurant the night before. busiest of the year. That said, its ability to grow its EBIT is not such a concern. It should also be noted that DTE Energy belongs to the integrated utilities sector, which is often considered quite defensive. Considering all of the above factors, it seems that DTE Energy is too leveraged. While some investors like this kind of risky play, it’s definitely not our cup of tea. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 5 warning signs with DTE Energy (at least 1 that cannot be ignored), and understanding them should be part of your investment process.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.