Health Check: How Prudently Does RWE (ETR:RWE) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that RWE Aktiengesellschaft (ETR:RWE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for RWE

What Is RWE's Net Debt?

You can click the graphic below for the historical numbers, but it shows that RWE had €4.02b of debt in September 2020, down from €7.86b, one year before. But it also has €7.74b in cash to offset that, meaning it has €3.72b net cash.

How Healthy Is RWE's Balance Sheet?

The latest balance sheet data shows that RWE had liabilities of €12.8b due within a year, and liabilities of €26.9b falling due after that. On the other hand, it had cash of €7.74b and €12.7b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €19.3b.

This is a mountain of leverage even relative to its gargantuan market capitalization of €23.7b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, RWE boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine RWE'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.

Over 12 months, RWE reported revenue of €14b, which is a gain of 5.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is RWE?

Although RWE had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of €741m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with RWE .

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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This article by Simply Wall St is general in nature. 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.
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