Is Xcel Energy (NASDAQ: XEL) a risky investment?

Warren Buffett said: “Volatility is far from synonymous with 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 notice that Xcel Energy Inc. (NASDAQ: XEL) has debt on its balance sheet. But the most important question is: what risk does this debt create?

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. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a business’s debt levels is to consider its cash flow and debt together.

What is Xcel Energy’s debt?

The image below, which you can click for more details, shows that in September 2021, Xcel Energy was in debt of US $ 23.3 billion, up from US $ 20.9 billion in a year. However, he also had $ 695.0 million in cash, so his net debt is $ 22.7 billion.

NasdaqGS: XEL History of debt to equity January 11, 2022

How healthy is Xcel Energy’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Xcel Energy had a liability of US $ 5.76 billion owed within 12 months and a liability of US $ 36.6 billion owed beyond that. In return, he had $ 695.0 million in cash and $ 1.68 billion in receivables due within 12 months. Its liabilities therefore total $ 40.0 billion more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company’s massive US $ 37.6 billion market cap, you may well be inclined to take a close look at the balance sheet. In the event that the company were to clean up its balance sheet quickly, it seems likely that shareholders would suffer significant dilution.

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 Xcel Energy has significant debt. However, its interest coverage of 2.6 is reasonably strong, which is a good sign. Fortunately, Xcel Energy has increased its EBIT by 3.2% over the past year, slowly reducing its debt to earnings. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Xcel Energy’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals are thinking, you might find this free report on analysts’ earnings forecasts Be interesting.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Xcel Energy has experienced substantial total negative free cash flow. While this may be the result of spending for growth, it makes debt much riskier.

Our point of view

At first glance, Xcel Energy’s net debt to EBITDA left us hesitant about the stock, and its conversion from EBIT to free cash flow was no more appealing than the only restaurant that was empty the night before. busiest of the year. That said, his ability to increase his EBIT is not that much of a concern. It should also be noted that companies in the electric utility industry like Xcel Energy generally use debt without a problem. Overall, it seems to us that Xcel Energy’s balance sheet is really very risky for the company. For this reason, we are fairly cautious about the stock, and we believe shareholders should keep a close eye on its liquidity. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. To this end, you should inquire about the 2 warning signs we spotted with Xcel Energy (including 1 which is potentially serious) .

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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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 any stock 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 any of the stocks mentioned.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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