Here's Why REN - Redes Energéticas Nacionais SGPS (ELI:RENE) Is Weighed Down By Its Debt Load

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 REN - Redes Energéticas Nacionais, SGPS, S.A. (ELI:RENE) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

What Is REN - Redes Energéticas Nacionais SGPS's Debt?

As you can see below, REN - Redes Energéticas Nacionais SGPS had €2.38b of debt at March 2025, down from €2.71b a year prior. Net debt is about the same, since the it doesn't have much cash.

How Strong Is REN - Redes Energéticas Nacionais SGPS' Balance Sheet?

We can see from the most recent balance sheet that REN - Redes Energéticas Nacionais SGPS had liabilities of €1.20b falling due within a year, and liabilities of €2.48b due beyond that. On the other hand, it had cash of €47.2m and €273.0m worth of receivables due within a year. So its liabilities total €3.36b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €2.10b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, REN - Redes Energéticas Nacionais SGPS would likely require a major re-capitalisation if it had to pay its creditors today.

View our latest analysis for REN - Redes Energéticas Nacionais SGPS

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

REN - Redes Energéticas Nacionais SGPS's debt is 5.0 times its EBITDA, and its EBIT cover its interest expense 4.3 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Even more troubling is the fact that REN - Redes Energéticas Nacionais SGPS actually let its EBIT decrease by 8.5% over the last year. If it keeps going like that paying off its debt will be like running on a treadmill -- a lot of effort for not much advancement. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if REN - Redes Energéticas Nacionais SGPS can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, REN - Redes Energéticas Nacionais SGPS basically broke even on a free cash flow basis. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Our View

Mulling over REN - Redes Energéticas Nacionais SGPS's attempt at staying on top of its total liabilities, we're certainly not enthusiastic. But at least its interest cover is not so bad. It's also worth noting that REN - Redes Energéticas Nacionais SGPS is in the Integrated Utilities industry, which is often considered to be quite defensive. After considering the datapoints discussed, we think REN - Redes Energéticas Nacionais SGPS has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for REN - Redes Energéticas Nacionais SGPS (1 makes us a bit uncomfortable) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.