Is DTE Energy (NYSE:DTE) a risky investment?

Warren Buffett famously said, “Volatility is far from synonymous with risk.” When we think about how risky a company is, we always want to look at its use of debt, as debt overload can lead to ruin. As with many other companies DTE Energieselskab (NYSE:DTE) uses debt. But the real question is whether this debt makes the company risky.

When is debt dangerous?

Debt and other obligations become risky for a company when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things go really wrong, the lenders can take control of the business. A more common (but still painful) scenario, however, is for it to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is where a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.

See our latest analysis for DTE Energy

How much debt does DTE Energy carry?

You can click on the graphic below for the historical numbers, but it shows that as of September 2024, DTE Energy had $24.6 billion in debt. USD, an increase of 20.3 billion. USD over a year. However, it also had 2.04 billion. USD in cash, so its net debt is 22.6 billion. USD.

How healthy is DTE Energy’s balance sheet?

The latest balance sheet data shows that DTE Energy had liabilities of 6.79 billion. USD, due within one year, and liabilities of 31.4 billion. USD due thereafter. As an offset against this, it had DKK 2.04 billion. USD in cash and 1.61 billion USD in receivables due within 12 months. So its liabilities outweigh the sum of its cash and (current) receivables by US$34.6 billion.

As this deficit is actually higher than the company’s massive market value of 25.2 billion. USD, we believe shareholders should really view DTE Energy’s debt levels like a parent watching their child ride a bike for the first time. Hypothetically speaking, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

We measure a company’s debt load relative to its earning capacity 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) covers its interest . expense (interest coverage). We thus consider debt in relation to earnings both with and without depreciation and amortization costs.

DTE Energy has a fairly high debt-to-EBITDA ratio of 6.5, suggesting a meaningful debt load. But the good news is that it boasts a fairly comforting interest coverage ratio of 2.8 times, which suggests it can responsibly service its liabilities. On a slightly more positive note, DTE Energy grew its EBIT by 10% over the past year, further increasing its ability 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 determine whether DTE Energy can strengthen its balance sheet over time. So if you are focused on the future, check this out free report showing analysts’ earnings forecasts.

But our final consideration is also important, for a company cannot pay debts with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of this EBIT that is matched by actual free cash flow. Over the past three years, DTE Energy has experienced significant negative free cash flow in total. While that may be a result of spending on growth, it makes the debt far riskier.

Our View

To be honest, both DTE Energy’s net debt to EBITDA and its track record of converting EBIT to free cash flow make us pretty uncomfortable with its debt levels. But on the bright side, its EBIT growth is a good sign and makes us more optimistic. It’s also worth noting that DTE Energy is in the Integrated Utilities industry, which is often considered quite defensive. We are quite clear that we consider DTE Energy to be quite risky due to its balance sheet condition. For this reason, we are quite cautious about the stock and believe that shareholders should keep a close eye on its liquidity. When analyzing debt levels, the balance sheet is the obvious place to start. But at the end of the day, any business can contain risks that exist off the balance sheet. These risks can be difficult to spot. All companies have them and we have seen them 2 warning signs for DTE Energy (1 of which makes us a little uncomfortable!) you should know about.

If, after all that, you’re more interested in a fast-growing company with a rock-solid balance sheet, check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general. We only provide commentary based on historical data and analyst forecasts 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 shares and does not take into account your goals or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any listed stocks.