Is E.ON (ETR:EOAN) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 E.ON SE ( ETR:EOAN ) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for E.ON

How Much Debt Does E.ON Carry?

You can click the graphic below for the historical numbers, but it shows that E.ON had €36.0b of debt in March 2023, down from €39.1b, one year before. However, because it has a cash reserve of €8.54b, its net debt is less, at about €27.5b.

How Healthy Is E.ON's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that E.ON had liabilities of €46.6b due within 12 months and liabilities of €56.6b due beyond that. On the other hand, it had cash of €8.54b and €33.6b worth of receivables due within a year. So its liabilities total €61.1b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €29.8b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, E.ON would likely require a major re-capitalisation if it had to pay its creditors today. 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 E.ON's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year E.ON wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to €121b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, E.ON still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €861m at the EBIT level. 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. But on the bright side the company actually produced a statutory profit of €862m and free cash flow of €5.0b. So there is definitely a chance that it can improve things in the next few years. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 5 warning signs we've spotted with E.ON .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free , right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.