David Iben put it well when he said: “Volatility is not a risk that we care about. Our aim is to avoid a permanent loss of capital.’ So it seems that smart money knows that debt — which usually plays a role in bankruptcies — is a very important factor when assessing a company’s risk. Important, Hawaiian Electric Industries, Inc. (NYSE:HE) is in debt. But the more important question is: How much risk does this debt carry?
Why is debt a risk?
Debt typically only becomes a real problem when a company cannot easily repay it, whether by raising capital or using its own cash flow. Ultimately, if the company fails to meet its legal obligations to pay down debt, shareholders could get away with nothing. However, a more common (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to get the debt under control. By replacing dilution, however, debt can be an extremely good tool for companies that need capital to invest in growth with high returns. When thinking about a company’s use of debt, let’s first consider cash and debt together.
Our analysis indicates this HE is potentially overrated!
What is Hawaiian Electric Industries Debt?
As you can see below, Hawaiian Electric Industries had $3.01 billion in debt at the end of September 2022, up from $2.47 billion a year ago. Click on the picture for more details. However, it also had $175.3 million in cash on hand, making its net debt $2.84 billion.
How Healthy is the Hawaii Electrical Industry’s Balance Sheet?
If we take a closer look at the latest balance sheet data, we see that Hawaiian Electric Industries had $829.9 million in debt that was due within 12 months and $13.2 billion in debt, which were due in addition. On the other hand, it had $175.3 million in cash and $6.14 billion in receivables due within a year. Therefore, its liabilities exceed the sum of its cash and (short-term) receivables by $7.76 billion.
That deficiency weighs heavily on the $4.41 billion company itself, like a child struggling under the weight of a giant backpack full of books, its gym gear, and a trumpet. So we would no doubt be watching his record closely. At the end of the day, Hawaiian Electric Industries would likely need a major recapitalization if its creditors started demanding a payback.
We measure a company’s debt burden relative to its profitability by dividing its net debt by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how well its earnings before interest and taxes (EBIT) are covering its interest costs (interest coverage) . In this way, we take into account both the absolute amount of the debt and the interest paid on it.
Hawaiian Electric Industries has a debt to EBITDA ratio of 4.2 and its EBIT covered its interest expense 3.8 times. This suggests that while the leverage is significant, we wouldn’t call it problematic. Given its debt burden, it’s hardly ideal that Hawaiian Electric Industries’ EBIT was fairly flat over the trailing 12 months. The balance sheet is clearly the area to focus on when analyzing debt. But it’s future earnings above all else that will determine Hawaiian Electric Industries’ ability to maintain a healthy balance sheet going forward. So if you focus on the future, you can check this free Analyst earnings forecast report.
Finally, while the helmsman may love book profits, lenders only accept cold, hard cash. So the logical step is to look at the proportion of that EBIT that corresponds to actual free cash flow. Over the past three years, Hawaiian Electric Industries has generated free cash flow equivalent to 12% of its EBIT, an uninspiring performance. This low cash conversion undermines its ability to manage and repay debt.
When we think about Hawaiian Electric Industries’ attempt to keep track of its total liabilities, we’re certainly not thrilled. But at least the EBIT growth rate isn’t that bad. We should also note that electric utility companies like Hawaiian Electric Industries typically use debt without issue. We’re pretty confident that we consider Hawaiian Electric Industries to be quite risky given its strong balance sheet. So we’re almost as wary of this stock as a hungry kitten is about to fall into its owner’s fishpond: bite once, shy twice, as the saying goes. Undoubtedly, we learn most about debt from the balance sheet. However, the entire investment risk is not on the balance sheet – far from it. For example, we have identified 2 Hawaiian Electric Industries warning signs (1 is slightly uncomfortable) you should be aware.
If you’re interested in investing in companies that can turn a profit without the burden of debt, then check this out free List of growing companies that have net cash on their balance sheets.
The assessment is complex, but we help to simplify it.
find out if Hawaiian electrical industry may be over or under priced by reviewing our comprehensive analysis which includes the following Fair Value Estimates, Risks and Warnings, Dividends, Insider Trading and Financial Health.
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