Is Portland General Electric’s (NYSE: POR) Balance Sheet Healthy?

‘Volatility is far from synonymous with risk,’ Warren Buffett famously stated. It’s only logical to look at a firm’s balance sheet when determining how hazardous it is since debt is often involved when a company fails. Portland General Electric Company (NYSE: POR) is a debt-ridden company. Should shareholders, however, be concerned about the company’s debt use?( )

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When Does Debt Become Dangerous?

Debt and other liabilities become dangerous for a company when it can’t readily meet its commitments, either via free cash flow or by obtaining money at a reasonable cost. If things go truly bad, the lenders have the option of seizing ownership of the company. A more common (but still costly) scenario is when a corporation has to dilute shareholders at a low share price to control debt. Debt, on the other hand, may be a very excellent tool for firms that require funds to invest in growth at high rates of return by substituting dilution. When we look at debt levels, we look at both cash and debt levels simultaneously.

What is the debt of Portland General Electric?

The historical figures are available by clicking the chart below, but it reveals that Portland General Electric had US$3.29 billion in debt as of September 2021, up from US$3.04 billion a year earlier. It does, however, have US$294.0 million in cash to counter this, resulting in net debt of around US$2.99 billion.

Is Portland General Electric’s Balance Sheet in Good Shape?

Portland General Electric has obligations of US$867.0 million due within a year and liabilities of US$6.00 billion due after that, according to the most current balance sheet. On the other hand, it had US$294.0 million in cash and US$273.0 million in receivables due within a year. As a result, its liabilities exceed its cash and short-term receivables by US$6.30 billion.

Given that the company’s debt is bigger than its market capitalization of US$4.65 billion, we believe investors should keep an eye on Portland General Electric’s debt levels like a parent watching their kid learn to ride a bike for the first time. If the firm were compelled to pay down its obligations by raising capital at the current share price, substantial dilution would be necessary.

We calculate how easily a company’s profits before interest and tax (EBIT) cover its interest expenditure and look at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) to determine its debt burden compared to its ear and(interest cover). This method considers both the debt’s total amount and the interest rates paid on it.

While Portland General Electric’s net debt to EBITDA ratio of 3.8 isn’t causing concern, we believe its super-low interest cover of 2.5 times indicates significant leverage. Because EBITDA is potentially a generous measure of profitability, it seems that the company incurs significant depreciation and amortization costs. As a result, the company’s debt burden may be more than it appears. As a result, shareholders should be aware that interest expenditures seem to have had a significant influence on the firm recently. On the brighter side, Portland General Electric’s EBIT increased by 26% the previous year. The debt should dissipate like a short drinking water supply during a sweltering summer if this expansion continues. When it comes to debt analysis, the balance sheet is the place to start. However, whether Portland General Electric can improve its balance sheet over time will ultimately be determined by the company’s future performance. So, if you’re looking forward, have a look at this free study that shows analyst profit estimates.

Finally, a company needs free cash flow to pay down debt; accounting earnings are insufficient. As a result, we constantly assess how much of that EBIT is converted into free cash flow. Portland General Electric has spent a lot of money in the previous three years. While investors are undoubtedly hoping for a turnaround shortly, it does seem that the company’s usage of debt is becoming increasingly dangerous.

Our Opinion

On the surface, Portland General Electric’s high level of total liabilities made us wary of the company. Its EBIT to free cash flow conversion was no more appealing than one vacant restaurant on the biggest night of the year. But, at the very least, it’s doing an excellent job of increasing EBIT; that’s positive. It’s also worth mentioning that Portland General Electric operates in the Electric utility sector, which is sometimes seen as defensive. Overall, we believe Portland General Electric’s financial sheet poses a significant risk to the company. As a result, we’re wary of the stock and think that shareholders should keep a careful check on its liquidity. When it comes to debt analysis, the balance sheet is the place to start. However, the balance sheet does not include all investment risks, much from it. For example, we’ve found one Portland General Electric warning sign that you should be aware of.

After all of that, if you’re looking for a fast-growing firm with a strong balance sheet, go no further than our list of net cash growth companies.

Sandy A. Greer