Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that NiSource Inc. (NYSE:NI) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is NiSource’s Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 NiSource had debt of US$9.06b, up from US$8.29b in one year. Net debt is about the same, since the it doesn’t have much cash.
How Healthy Is NiSource’s Balance Sheet?
The latest balance sheet data shows that NiSource had liabilities of US$3.81b due within a year, and liabilities of US$12.2b falling due after that. On the other hand, it had cash of US$23.7m and US$911.7m worth of receivables due within a year. So its liabilities total US$15.1b more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company’s massive market capitalization of US$10.8b, we think shareholders really should watch NiSource’s debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine NiSource’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year NiSource managed to grow its revenue by 3.8%, to US$5.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months NiSource produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$90m. When we look at that alongside the significant liabilities, we’re not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$1.2b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. For riskier companies like NiSource I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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