CenterPoint Energy (NYSE:CNP) Has No Shortage Of 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.' 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. As with many other companies CenterPoint Energy, Inc. (NYSE:CNP) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CenterPoint Energy

How Much Debt Does CenterPoint Energy Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 CenterPoint Energy had US$19.9b of debt, an increase on US$18.3b, over one year. On the flip side, it has US$643.0m in cash leading to net debt of about US$19.2b.

How Healthy Is CenterPoint Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CenterPoint Energy had liabilities of US$3.84b due within 12 months and liabilities of US$28.5b due beyond that. On the other hand, it had cash of US$643.0m and US$1.21b worth of receivables due within a year. So its liabilities total US$30.5b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$19.1b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, CenterPoint Energy would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 2.3 times and a disturbingly high net debt to EBITDA ratio of 6.2 hit our confidence in CenterPoint Energy like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. The good news is that CenterPoint Energy improved its EBIT by 3.1% over the last twelve months, thus gradually reducing its debt levels relative to its earnings. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if CenterPoint Energy 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 it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, CenterPoint Energy saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, CenterPoint Energy's net debt to EBITDA left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability to grow its EBIT isn't such a worry. We should also note that Integrated Utilities industry companies like CenterPoint Energy commonly do use debt without problems. Taking into account all the aforementioned factors, it looks like CenterPoint Energy 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for CenterPoint Energy (of which 1 can't be ignored!) you should know about.

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.