Does ENGIE (EPA: ENGI) have a healthy balance sheet?

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Some say volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett said “volatility is far from risk.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that ENGIE SA (EPA: ENGI) uses debt in its activities. But the real question is whether this debt makes the business risky.

Why Does Debt Bring Risk?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

See our latest analysis for ENGIE

What is ENGIE’s debt?

As you can see below, ENGIE had 35.9 billion euros in debt, as of December 2020, roughly the same as the year before. You can click on the graph for more details. However, because it has a cash reserve of € 20.7 billion, its net debt is lower, at around € 15.2 billion.

ENXTPA: History of ENGI’s debt on equity June 25, 2021

A look at ENGIE’s liabilities

Zooming in on the latest balance sheet data, we can see that ENGIE had a liability of 54.0 billion euros at 12 months and a liability of 65.3 billion euros beyond. In return, he had 20.7 billion euros in cash and 30.4 billion euros in receivables due within 12 months. Its liabilities thus exceed the sum of its cash and its (short-term) receivables by € 68.2 billion.

This deficit casts a shadow over the € 28.2 billion company, like a colossus towering above mere mortals. We therefore believe that shareholders should monitor it closely. After all, ENGIE 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). Thus, we consider debt versus earnings with and without amortization charges.

ENGIE has a net debt of 1.9 times EBITDA, which is not too much, but its interest coverage seems a bit weak, with EBIT at only 6.0 times interest expense. This is in large part due to the company’s large depreciation and amortization charges, which arguably means that its EBITDA is a very generous measure of profit, and its debt may be heavier than it appears. At first glance. The bad news is that ENGIE saw its EBIT drop by 15% compared to last year. If this type of decline is not stopped, managing your debt will be more difficult than selling broccoli ice cream at a higher price. The balance sheet is clearly the area you need to focus on when analyzing debt. But in the end, the company’s future profitability will decide whether ENGIE can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the tax authorities love accounting profits, lenders only accept hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, ENGIE’s free cash flow has amounted to 44% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.

Our point of view

Reflecting on ENGIE’s attempt to stay on top of its total liabilities, we are certainly not enthusiastic. But at least its interest coverage isn’t that bad. It should also be noted that companies in the integrated utilities sector like ENGIE generally use debt without a problem. Overall, it seems to us that ENGIE’s balance sheet is really very risky for the company. For this reason, we are quite cautious on the stock, and we believe that shareholders should keep a close eye on its liquidity. 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 off the balance sheet. Know that ENGIE shows 1 warning sign in our investment analysis , you must know…

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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