Consolidated Edison (NYSE: ED) appears to be using a lot of debt

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. ” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Consolidated Edison, Inc. (NYSE: ED) uses debt. But the most important question is: what risk does this debt create?

When Is Debt a Problem?

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. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.

What is Consolidated Edison’s net debt?

You can click on the graph below for historical numbers, but it shows that as of June 2021 Consolidated Edison had $ 24.1 billion in debt, an increase from $ 23.1 billion, year on year. . On the other hand, it has $ 1.07 billion in cash, resulting in net debt of around $ 23.1 billion.

NYSE: ED History of Debt to Equity October 24, 2021

A look at Edison’s consolidated liabilities

According to the latest published balance sheet, Consolidated Edison had liabilities of US $ 5.56 billion due within 12 months and liabilities of US $ 37.3 billion due beyond 12 months. In return, he had $ 1.07 billion in cash and $ 2.81 billion in receivables due within 12 months. It therefore has liabilities totaling US $ 39.0 billion more than its cash and short-term receivables combined.

Given that this deficit is actually greater than the company’s massive market cap of $ 26.9 billion, we think shareholders should really watch Consolidated Edison’s debt levels, like a parent watching their child. riding a bike for the first time. Hypothetically, an extremely large dilution would be required if the company was forced to repay its debts by raising capital at the current share price.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). 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 5.1, it’s fair to say that Consolidated Edison has significant debt. However, its interest coverage of 2.6 is reasonably strong, which is a good sign. Given the leverage, it is not ideal that Consolidated Edison’s EBIT has been fairly stable over the past twelve months. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Consolidated Edison can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Consolidated Edison has spent a lot of money. While this may be the result of spending on growth, it makes debt much riskier.

Our point of view

At first glance, Consolidated Edison’s level of total liabilities left us hesitant about inventory, and its conversion of EBIT to free cash flow was no more appealing than the single empty restaurant on the busiest night of the week. ‘year. But at least its EBIT growth rate isn’t that bad. It’s also worth noting that Consolidated Edison belongs to the integrated utilities industry, which is often seen as quite defensive. Considering all of the above factors, it looks like Consolidated Edison has too much debt. This kind of risk is acceptable to some, but it certainly does not float our boat. 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. Concrete example: we have spotted 4 warning signs for Consolidated Edison you have to be aware of this, and one of them cannot be ignored.

If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of cash net growth stocks without delay.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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John A. Bogar

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