Fishing resources

Here’s why MDU Resources Group (NYSE: MDU) has a heavy debt burden


Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We notice that MDU Resource Group, Inc. (NYSE: MDU) has debt on its balance sheet. But should shareholders be concerned about its use of debt?

When is Debt a Problem?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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. The first step in examining a business’s debt levels is to consider its cash flow and debt together.

How much debt does MDU Resources Group have?

As you can see below, MDU Resources Group was in debt of US $ 2.38 billion in September 2021, which is roughly the same as the year before. You can click on the graph for more details. On the other hand, it has $ 57.2 million in cash, resulting in net debt of around $ 2.32 billion.

NYSE: MDU Debt to Equity History December 27, 2021

How strong is MDU Resources Group’s balance sheet?

According to the latest published balance sheet, MDU Resources Group had liabilities of US $ 1.07 billion due within 12 months and liabilities of US $ 4.16 billion due beyond 12 months. On the other hand, he had $ 57.2 million in cash and $ 979.9 million in receivables due within one year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by US $ 4.20 billion.

This is a mountain of leverage compared to its market cap of US $ 6.00 billion. This suggests that shareholders would be greatly diluted if the company needed to consolidate its balance sheet quickly.

We measure a company’s indebtedness relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

MDU Resources Group’s debt is 2.7 times its EBITDA, and its EBIT covers its interest expense 6.0 times as much. This suggests that while debt levels are significant, we would stop calling them problematic. MDU Resources Group increased its EBIT by 6.1% over the past year. While it hardly strikes us, it is a bright spot when it comes to debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine MDU Resources Group’s ability to maintain a healthy balance sheet going forward. 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. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, MDU Resources Group has created free cash flow of 4.9% of EBIT, a performance that is without interest. For us, the conversion to cash that elicits a bit of paranoia is the ability to extinguish debt.

Our point of view

MDU Resources Group’s conversion of EBIT to free cash flow was a real negative on this analysis, although other factors we took into account cast it in a much better light. But on the bright side, its ability to increase its EBIT is not at all shabby. We should also note that companies in the integrated utilities sector like MDU Resources Group generally use debt without problem. When we consider all the factors discussed, it seems to us that MDU Resources Group 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. Note that MDU Resources Group displays 1 warning sign in our investment analysis , you must know…

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

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