Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Pinnacle West Capital Corporation (NYSE:PNW) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Pinnacle West Capital's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 Pinnacle West Capital had US$9.21b of debt, an increase on US$8.47b, over one year. Net debt is about the same, since the it doesn't have much cash.
NYSE:PNW Debt to Equity History June 9th 2024
How Strong Is Pinnacle West Capital's Balance Sheet?
We can see from the most recent balance sheet that Pinnacle West Capital had liabilities of US$3.06b falling due within a year, and liabilities of US$15.5b due beyond that. Offsetting these obligations, it had cash of US$9.63m as well as receivables valued at US$573.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$18.0b.
This deficit casts a shadow over the US$8.60b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Pinnacle West Capital would likely require a major re-capitalisation if it had to pay its creditors today.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Pinnacle West Capital shareholders face the double whammy of a high net debt to EBITDA ratio (5.2), and fairly weak interest coverage, since EBIT is just 2.5 times the interest expense. The debt burden here is substantial. Fortunately, Pinnacle West Capital grew its EBIT by 8.7% in the last year, slowly shrinking its debt relative to earnings. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Pinnacle West Capital's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Pinnacle West Capital 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
To be frank both Pinnacle West Capital's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at growing its EBIT; that's encouraging. We should also note that Electric Utilities industry companies like Pinnacle West Capital commonly do use debt without problems. After considering the datapoints discussed, we think Pinnacle West Capital has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Pinnacle West Capital you should be aware of, and 1 of them can't be ignored.
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.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
ハワード・マークス氏は、株価の変動よりも、破綻の可能性があることこそリスクであると述べ、実務投資家たちも同じように心配していることを上手く表現しています。つまり、破産に関連することが多い債務は、企業のリスクを評価する際に非常に重要なファクターであるということです。重要なことではあるが、Pinnacle West Capital Corporation (NYSE:PNW)が債務を負っていること自体が株主にとって懸念材料となるでしょうか。
下のグラフをクリックして、過去の数字を確認できますが、2024年3月時点でPinnacle West Capitalは92.1億ドルの債務を負っており、1年間に84.7億ドル増加しました。純負債も同じくらいで、現金がほとんどないためです。
NYSE:PNWの負債対資本比履歴2024年6月9日
Pinnacle West Capitalの財務状況はどのようになっていますか?
最新の財務諸表から、Pinnacle West Capitalは1年以内に支払われる3.06億ドルの負債と、それより長い期間で支払われる15.5億ドルの負債を負っていました。これらの負債の債務は、12か月以内の現金および債権で相殺することができます。つまり、現金と(短期的な)債権の総額は18.0億ドル足りていません。
この赤字は、86億ドルの企業に影を落とします。Pinnacle West Capitalにとって、負債者に今日払う必要がある場合、大規模な資本増強が必要になるでしょう。
Pinnacle West Capitalの株主は、純負債対EBITDA比率が高く(5.2)、EBITが利息費用の2.5倍しかないため、利息カバレッジが弱めであることに直面しています。債務負担はかなり大きいです。幸いにも、Pinnacle West Capitalは昨年にEBITを8.7%増加させ、収益に対する債務を徐々に減らしてきたことが分かります。債務に関しては、バランスシートが一番大事な情報源となります。しかし、健全なバランスシートを維持するためには、将来の利益が何よりも重要であることを覚えておいてください。将来にフォーカスするのであれば、アナリストの利益予測を示した無料レポートをチェックすることもできます。
最後にもう一つ重要なことがあります。企業は紙上の利益では債務を支払えません。冷たい現金が必要です。そこで、EBITのどれだけがフリーキャッシュフローに転化されたかを常に確認しています。この3年間で、Pinnacle West Capitalは合計で相当なマイナスフリーキャッシュフローを記録しました。減少は成長に伴う支出の結果と考えられますが、債務リスクが高まっていると言えます。
私たちの見解
正直に言うと、Pinnacle West CapitalのEBITからフリーキャッシュフローへの転換率、および総債務の管理の記録は、同社の負債レベルにはかなり不快感を抱かせます。ただ、同社はEBITの成長にかなり優れていることを注目する必要があります。Electric Utilities業界の企業は、Pinnacle West Capitalのように借入金に問題なく対処している企業もあります。議論されたデータポイントを考慮した結果、私たちはPinnacle West Capitalが債務を抱えすぎていると結論付けました。このようなリスクは一部の企業に取っては問題ないこともありますが、私たちにとっては好ましくありません。バランスシートを分析する際には、バランスシートの外部に存在するリスクも存在することを忘れないでください。要点:Pinnacle West Capitalには、無視できない2つの警告事項があります。1つは無視できないものです。詳しく知りたい方はこちらの無料レポートをご覧ください。
オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。
オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。