Health Check: How Prudently Does EQT (NYSE:EQT) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies EQT Corporation (NYSE:EQT) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for EQT

How Much Debt Does EQT Carry?

As you can see below, at the end of December 2021, EQT had US$5.49b of debt, up from US$4.93b a year ago. Click the image for more detail. However, because it has a cash reserve of US$114.0m, its net debt is less, at about US$5.37b.

How Strong Is EQT's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that EQT had liabilities of US$5.08b due within 12 months and liabilities of US$6.48b due beyond that. On the other hand, it had cash of US$114.0m and US$1.44b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$10.0b.

Given this deficit is actually higher than the company's market capitalization of US$9.19b, we think shareholders really should watch EQT'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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine EQT'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 EQT wasn't profitable at an EBIT level, but managed to grow its revenue by 158%, to US$6.7b. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though EQT managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable US$1.0b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of US$1.2b. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with EQT , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.