Unitil (NYSE:UTL) appears to be taking on a lot of debt

David Iben put it best when he said, “Volatility is not a risk we care about. We care about avoiding permanent loss of capital.” When we think about how risky a company is, we look at ourselves always include the use of debt, because over-indebtedness can lead to ruin. What is important is Unitil Corporation (NYSE:UTL) carries debt. But the real question is whether this debt makes the company risky.

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a business cannot easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While this isn’t all that common, we often see indebted companies permanently diluting their shareholders because lenders force them to raise capital at a distressed price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first consider cash and debt together.

Check out our latest analysis for Unitil

How much debt does Unitil have?

As you can see below, Unitil had $707.6 million in debt at the end of September 2024, up from $645.5 million a year ago. Click on the image for more details. Net debt is about the same since there isn’t much cash.

A look at Unitil’s liabilities

If we take a closer look at the latest balance sheet data, we can see that Unitil had liabilities of US$179.2m due within 12 months and liabilities of US$1.06b that were due beyond this. Offsetting this, it had US$6.30m in cash and US$63.9m in receivables that were due within 12 months. So its liabilities total US$1.16b more than its cash and short-term receivables combined.

Given that this deficit is actually higher than the company’s market capitalization of US$905.6m, we think shareholders should really pay attention to Unitil’s debt, like a parent watching their child ride a bike for the first time watching. Hypothetically, extremely large dilution would be required if the company were forced to pay off its debt by raising capital at the current share price.

We measure a company’s debt load relative to its earnings power by dividing its net debt by its earnings before interest, tax, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and tax (EBIT) can cover its interest expense (interest cover). ). We take into account both the absolute amount of the debt and the interest paid on it.

Unitil has a debt to EBITDA ratio of 4.3 and its EBIT covered its interest expense by 2.6 times. Taken together, this means that while we do not want to see debt levels increase, we believe current levels of debt can be managed. The good news is that Unitil improved its EBIT by 6.9% over the last twelve months, gradually reducing its debt relative to its earnings. There is no doubt that the balance sheet is where we learn the most about debt. But it is future earnings that will determine whether Unitil can maintain a healthy balance sheet in the future. So if you’re focused on the future, you can look at that free Report with analyst profit forecasts.

And finally, while the tax officer is happy about accounting profits, lenders only accept cold hard cash. So the logical step is to examine the proportion of that EBIT that corresponds to actual free cash flow. Over the last three years, Unitil has burned through a lot of cash. While this may be due to growth spending, it makes debt significantly riskier.

Our view

At first glance, Unitil’s total liabilities make us uncertain about the stock, and converting EBIT to free cash flow was no more tempting than the one empty restaurant on the busiest night of the year. But at least the company is managing to grow its EBIT pretty well; that is encouraging. It’s also worth noting that Unitil operates in the integrated utilities industry, which is often viewed as quite defensive. We are clear that we consider Unitil to be rather risky given its balance sheet health. That’s why we’re almost as wary of this population as a hungry kitten when it falls into its owner’s fish pond: once bitten, twice shy, as the saying goes. There is no doubt that the balance sheet is where we learn the most about debt. However, not all investment risks lie on the balance sheet – quite the opposite. We’ve identified two warning signs with unitil (at least 1, which makes us a little uncomfortable) and understanding them should be part of your investment process.

If, after all that, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks immediately.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.