Is New Jersey Resources (NYSE: NJR) a risky investment?
Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Mostly, New Jersey Resource Society (NYSE: NJR) is in debt. But the most important question is: what risk does this debt create?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
See our latest analysis for New Jersey resources
How Much Debt Do New Jersey Resources Carry?
You can click on the graph below for historical figures, but it shows that as of March 2021, New Jersey Resources was in debt of $ 2.23 billion, an increase from $ 1.99 billion. US, over one year. However, it has $ 57.7 million in cash offsetting that, leading to net debt of around $ 2.17 billion.
How strong is New Jersey Resources’ balance sheet?
We can see from the most recent balance sheet that New Jersey Resources had liabilities of US $ 416.1 million maturing within one year and liabilities of US $ 3.19 billion maturing within one year. of the. On the other hand, it had US $ 57.7 million in cash and US $ 276.1 million in receivables due within one year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by US $ 3.27 billion.
This is a mountain of leverage compared to its market cap of US $ 4.25 billion. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
New Jersey Resources has a debt to EBITDA ratio of 4.8 and its EBIT covered its interest expense 4.7 times. This suggests that while debt levels are significant, we would stop calling them problematic. It should be noted that New Jersey Resources’ EBIT has soared like bamboo after the rain, gaining 70% in the past twelve months. This will make it easier to manage your 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 New Jersey Resources can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, New Jersey Resources has recorded substantial total negative free cash flow. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.
Our point of view
Neither New Jersey Resources’ ability to convert EBIT to free cash flow nor its net debt to EBITDA gave us confidence in its ability to take on more debt. But its EBIT growth rate tells a very different story and suggests some resilience. It should also be noted that New Jersey Resources is part of the gas utilities industry, which is often viewed as quite defensive. When we consider all the factors discussed, it seems to us that New Jersey Resources is taking risks with its recourse to debt. So while this leverage increases returns on equity, we wouldn’t really want to see it increase from here. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. We have identified 2 warning signs with New Jersey Resources (at least 1 which is a bit of a concern), and understanding them should be part of your investment process.
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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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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