Does Northwest Natural Holding (NYSE: NWN) have a healthy balance sheet?
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Northwestern Natural Holding Company (NYSE: NWN) uses debt in its business. But does this debt concern shareholders?
When Is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Northwest Natural Holding
What is the debt of Northwest Natural Holding?
As you can see below, Northwest Natural Holding had US $ 1.22 billion in debt in June 2021, which is roughly the same as the year before. You can click on the graph for more details. Net debt is about the same because it doesn’t have a lot of cash.
How healthy is Northwest Natural Holding’s balance sheet?
We can see from the most recent balance sheet that Northwest Natural Holding had liabilities of US $ 572.5 million maturing within one year and liabilities of US $ 2.29 billion maturing. beyond. In compensation for these obligations, it had cash of US $ 20.1 million as well as receivables valued at US $ 77.0 million at 12 months. Its liabilities therefore total $ 2.76 billion more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the $ 1.42 billion company like a colossus towering over mere mortals. So we would be watching its record closely, without a doubt. After all, Northwest Natural Holding would likely need a major recapitalization if it were to pay its creditors today.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Northwest Natural Holding has a debt to EBITDA ratio of 4.1 and its EBIT has covered its interest expense 4.1 times. This suggests that while debt levels are significant, we would stop calling them problematic. Looking on the bright side, Northwest Natural Holding has increased its EBIT by 40% over the past year. Like a mother’s loving embrace of a newborn, this type of growth builds resilience, putting the business in a stronger position to manage debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Northwest Natural Holding can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Northwest Natural Holding has spent a lot of money. While this may be the result of spending on growth, it makes debt much riskier.
Our point of view
At first glance, Northwest Natural Holding’s conversion of EBIT to free cash flow left us hesitant about the stock, and its total liability level was no more appealing than the single empty restaurant on the busiest night of the year. But on the positive side, its EBIT growth rate is a good sign and makes us more optimistic. It should also be noted that Northwest Natural Holding belongs to the gas utilities sector, which is often viewed as quite defensive. We’re pretty clear that we consider Northwest Natural Holding to be really quite risky, because of the health of its balance sheet. For this reason, we are quite cautious on the stock, and we believe that shareholders should closely monitor its liquidity. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for Northwest Natural Holding (1 doesn’t suit us very well!) Which you should be aware of before investing here.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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