A company’s debt, liabilities and risk are really critical factors in bargain a company. Having an bargain of a company’s debt and liabilities is a pivotal member in bargain a risk of a company, so assisting assist in a preference to invest, not to deposit or to stay invested in a company. There are many metrics concerned in bargain a debt of a company, yet for this article, we will demeanour during Duke Energy’s (DUK) sum debt, sum liabilities, debt ratios and WACC.
Through a above-mentioned 4 categorical metrics, we will know some-more about a company’s debt, liabilities and risk. If this outline is compared with other companies in a same sector, we will be means see that has a many debt and a many risk.
1. Total Debt = Long Term Debt + Short Term Debt
A debt is an volume of income borrowed by one celebration from another, and contingency be paid back. Total debt is a further of long-term debt, that is debt that is due in one year or more, and short-term debt, that is any debt that is due within one year. The multiple of a dual is sum debt.
- 2007 – $9.498 billion + 2.268 billion = $11.766 billion
- 2008 – $13.250 billion + $1.189 billion = $14.439 billion
- 2009 – $16.113 billion + $902 million = $17.015 billion
- 2010 – $17.935 billion + $491 million = $18.426 billion
- 2011 – $18.679 billion + $2.321 billion = $21.00 billion
Duke Energy’s sum debt has augmenting severely over a past 5 years. The association reported a five-year low of $11.766 billion in 2007 and a five-year high in 2011 during $21.00 billion. The company’s 2011 reported sum debt of $21.00 billion, an boost of 78.48% over 2007.
2. Total Liabilities
Liabilities are a company’s authorised debts or obligations that arise during a march of business operations, so debts are one form of liability, yet not all liabilities. Total liabilities are a further of long-term liabilities, that are a liabilities that are due in one year or more, and short-term, or stream liabilities, are any liabilities due within one year. The multiple of a dual equals a sum liabilities.
- 2007 – $28.505 billion
- 2008 – $32.089 billion
- 2009 – $35.290 billion
- 2010 – $36.568 billion
- 2011 – $39.754 billion
Duke Energy’s liabilities have augmenting from $28.505 billion in 2007 to $39.754 billion in 2011, an boost of 39.46%.
In examining a company’s sum debt and liabilities, we can see that a association now has a vast volume of debt during $21.00 billion and a sizeable volume of liabilities during $39.754 billion. Over a past 5 years, a sum debt has augmenting by 78.48%, while a sum liabilities have augmenting by 39.46%. As many of a debt and liabilities were acquired in a merger of assets, a subsequent step will exhibit if a association has a ability to recompense for these assets.
3. Total Debt to Total Assets Ratio = Total Debt / Total Assets
This is a metric used to magnitude a company’s financial risk by last how many of a company’s resources have been financed by debt. It is distributed by adding short-term and long-term debt and afterwards dividing by a company’s sum assets.
A debt ratio of incomparable than 1 indicates that a association has some-more sum debt than assets, meanwhile, a debt ratio of reduction than 1 indicates that a association has some-more resources than sum debt. Used along with other measures of financial health, a sum debt to sum resources ratio can assistance investors establish a company’s turn of risk.
- 2009 – $17.015 billion / $57.040 billion = 0.30
- 2010 – $18.426 billion / $59.090 billion = 0.31
- 2011 – $21.000 billion / $62.526 billion = 0.34
As Duke Energy’s sum debt to sum resources ratio is good subsequent 1, this indicates that Duke Energy has many some-more resources than sum debt, ensuring that a association is now in good financial condition.
4. Debt ratio = Total Liabilities / Total Assets
Total liabilities divided by sum assets. The debt ratio shows a suit of a company’s resources that are financed by debt. If a ratio is reduction than 0.5, many of a company’s resources are financed by equity. If a ratio is incomparable than 0.5, many of a company’s resources are financed by debt. Companies with high debt/asset ratios are pronounced to be “highly leveraged.” A association with a high debt ratio or that is “highly leveraged” could be in risk if creditors start to direct amends of debt.
- 2009 – $17.015 billion / $35.290 billion = 0.48
- 2010 – $18.426 billion / $36.568 billion = 0.50
- 2011 – $21.000 billion / $39.754 billion = 0.53
In looking during Duke Energy’s sum liabilities to sum resources ratio, we can see that a ratio has augmenting really somewhat over a past 3 years. As these numbers are above are around 0.50, this indicates that Duke Energy has financed some of a company’s resources by debt. Duke Energy has utterly a low debt ratio implying that a is not in risk of apropos ruined and/or going bankrupt.
5. Debt to Equity Ratio = Total Liabilities / Shareholder’s Equity
The debt to equity ratio is another precedence ratio that compares a company’s sum liabilities to a sum shareholder’s equity. This is a dimensions of how many suppliers, lenders, creditors and obligators have committed to a association contra what a shareholders have committed.
A high debt to equity ratio generally means that a association has been assertive in financing a expansion with debt. This can outcome in a association stating flighty earnings. In general, a high debt to equity ratio indicates that a association might not be means to beget adequate money to prove a debt obligations, and therefore is deliberate a riskier investment.
- 2009 – $17.015 billion / $21.750 billion = 0.78
- 2010 – $18.426 billion / $22.522 billion = 0.81
- 2011 – $21.000 billion / $22.772 billion = 0.92
Duke Energy’s 2011 debt to equity ratio has augmenting compared to 2009 yet overall, a ratio is really low. As a ratio is subsequent 1 this indicates that suppliers, lenders, creditors and obligators have reduction equity invested than shareholders. This also indicates a low volume of risk for a company. As a ratio is subsequent 1 and deliberate low, so has a risk for a company.
6. Capitalization Ratio = LT Debt / LT Debt + Shareholders’ equity
(LT Debt = Long Term Debt)
The capitalization ratio tells a investors about a border to that a association is regulating a equity to support a operations and growth. This ratio helps in a comment of risk. The companies with a high capitalization ratio are deliberate to be risky, since they are during a risk of penury if they destroy to repay their debt on time. Companies with a high capitalization ratio might also find it formidable to get some-more loans in a future.
- 2009 – $16.113 billion / $37.863 billion = 0.43
- 2010 – $17.935 billion / $40.457 billion = 0.44
- 2011 – $18.679 billion / $41.451 billion = 0.45
Over a past 3 years, Duke Energy’s capitalization ratio has been augmenting really slightly. This implies that a association has had somewhat reduction equity compared to a long-term debt. As this is a case, a association has had somewhat reduction equity to support a operations and supplement expansion by a equity. As a ratio has usually somewhat augmenting so to has a company’s risk.
7. Interest Coverage Ratio = EBIT (Earnings before seductiveness and taxes) / Interest Expenses
The seductiveness coverage ratio is used to establish how simply a association can recompense seductiveness losses on superb debt. The ratio is distributed by dividing a company’s gain before seductiveness and taxes (EBIT) by a company’s seductiveness losses for a same period. The reduce a ratio, a some-more a association is impeded by debt expense, a aloft a ratio a better. When a company’s seductiveness coverage ratio is 1.5 or lower, a ability to accommodate seductiveness losses might be questionable.
- 2010 – $2.582 billion / $751 million = 3.43
- 2010 – $3.050 billion / $840 million = 3.63
- 2011 – $3.324 billion / $859 million = 3.87
Like a other ratios listed above, Duke Energy’s seductiveness coverage ratio has been augmenting really slightly. As a seductiveness ratio is utterly assuage during 3.87 this implies that a association is not impeded by debt expenses.
8. Cash Flow to Total Debt Ratio = Operating Cash Flow / Total Debt
This coverage ratio compares a company’s handling money upsurge to a sum debt. This ratio provides an denote of a company’s ability to cover sum debt with a yearly money upsurge from operations. The aloft a commission ratio, a improved a company’s ability to lift a sum debt. The incomparable a ratio, a improved a association can continue severe mercantile conditions.
- 2009 – $3.463 billion / $17.015 billion = 0.20
- 2010 – $4.511 billion / $18.426 billion = 0.24
- 2011 – $3.672 billion / $21.000 billion = 0.17
As a money upsurge to debt ratio in a prior 3 years is subsequent 100% or 1, this implies that a association has not had a ability to cover a sum debt with a yearly money upsurge from operations.
Based on a above 6 debt ratios, we can see that Duke Energy has clever formula in regards to a debt ratios. Based on a formula indicated above, all of a ratios solely a money upsurge to debt ratio have been increasing, yet as they have usually somewhat augmenting no red flags are raised. Based on a clever formula from a ratios above, this indicates that Duke Energy has a ability to recompense for a debt, and is not on a verge of bankruptcy. The subsequent step will exhibit how many a association will recompense for a debt incurred.
Cost of Debt
The cost of debt is a effective rate that a association pays on a sum debt.
As a association acquires debt by several bonds, loans and other forms of debt, a cost of debt metric is useful, since it gives an thought as to a altogether rate being paid by a association to use debt financing.
This magnitude is also useful, since it gives investors an thought as to a riskiness of a association compared to others. The aloft a cost of debt a aloft a risk.
9. Cost of debt (before tax) = Corporate Bond rate of company’s bond rating.
- SP rated Caterpillar Inc. holds “BBB+“
- Current 20 year corporate bond Rate of “BBB” = 6.69%
- Current cost of Debt as of Aug 22nd 2012 = 6.69%
According to a SP rating guide a “BBB+” rating is – “Adequate ability to accommodate financial commitments, yet some-more theme to inauspicious mercantile conditions.” Duke Energy has a rating that meets this description.” (Please note: As BBB+ was not listed, we used a BBB rating for this section.)
An glorious essay in regards to a new hillside of Duke Energy. SP Cuts Duke Energy Corp Rating.
10. Current taxation rate ( Income Tax sum / Income before Tax)
- 2007 – $712 million / $2.234 billion = 31.87%
- 2008 – $616 million / $1.895 billion = 32.51%
- 2009 – $758 million / $1.831 billion = 41.39%
- 2010 – $890 million / $2.210 billion = 40.27%
- 2011 – $752 million / $2.465 billion = 30.50%
5 year normal discounting 2009 = 35.30%
Over a past 5 years Duke Energy has averaged a taxation rate of 35.30%.
11. Cost of Debt (After Tax) = (Cost of debt before tax) (1 – taxation rate)
The effective rate that a association pays on a stream debt after tax.
- .0669 x (1 – .3530) = Cost of debt after tax
The cost of debt after taxation for Duke Energy is 4.33%
Cost of equity or R equity = Risk giveaway rate + Beta equity(Average marketplace lapse – Risk giveaway rate)
The cost of equity is a lapse a organisation theoretically pays to a equity investors, for example, shareholders, to recompense for a risk they commence by investing in their company.
- Risk giveaway rate = US 10 year bond = 1.75% (Bloomberg)
- average marketplace lapse 1950 – 2011 = 7%
- Beta = (Google finance) Duke Energy beta = 0.33
Risk giveaway rate + Beta equity(Average marketplace lapse – Risk giveaway rate)
- 1.75 + 0.33 (7-1.75)
- 1.75 + 0.33 x 5.25
- 1.75 + 1.73 = 3.48%
Duke Energy’s has a cost of equity or R Equity of 3.48%. So investors should design to get a lapse of 3.48% over a prolonged tenure on their investment to recompense for a risk they commence by investing in this company.
(Please note that this is a CAPM proceed to anticipating a cost of equity. Inherently, there are some flaws with this proceed and that a numbers are really “general.” This proceed is formed off of a SP normal lapse from 1950 – 2011 during 7%, a US 10-year bond for a risk giveaway rate that is receptive to daily change and Google financial beta.)
Weighted Average Cost of Capital or WACC
The WACC calculation is a calculation of a company’s cost of collateral in that any difficulty of collateral is equally weighted. All collateral sources such as common stock, elite stock, holds and all other long-term debt are enclosed in this calculation.
As a WACC of a organisation increases, and a beta and rate of lapse on equity increases, this states a diminution in gratefulness and a aloft risk.
By holding a weighted average, we can see how many seductiveness a association has to recompense for each dollar it finances.
For this calculation we will need to know a following listed below:
Tax Rate = 35.30% (Duke Energy’s five-year normal Tax Rate)
Cost of Debt (before tax) or R debt = 6.69%
Cost of Equity or R equity = 3.48%
Debt (Total Liabilities) for 2011 or D = $39.754 billion
Stock Price = $65.85 (August 22, 2012)
Outstanding Shares = 704.13 Million
Equity = Stock cost x Outstanding Shares or E = $ 46.366 billion
Debt + Equity or D+E = $86.120 billion
WACC = R = (1 – Tax Rate) x R debt (D/D+E) + R equity (E/D+E)
(1 – Tax Rate) x R debt (D/D+E) + R equity (E/D+E)
(1 – .3530) x .0669 x ($39.754/$86.120) + .0348 ($46.366/$86.120)
.647 x .0669 x .4616 + .0348 x .5383
.0199 + .0187
Based on a calculations above, we can arrive that Duke Energy pays 3.86% on each dollar that it finances or .0386 on each dollar. From this calculation we know that on each dollar a association spends on an investment, a association contingency make $.0386, and a cost of a investment for a investment to be possibly for a company.
In examining a company’s sum debt and liabilities, we can see that a association now has a vast volume of debt during $21.00 billion and a sizeable volume of liabilities during $39.754 billion. Over a past 5 years, a sum debt has augmenting by 78.48%, while a sum liabilities have augmenting by 39.46%. Even yet a debt and liabilities have augmenting by 78.48% and 39.46% , many of this debt was incurred by a squeeze of resources in a expectation of flourishing and improving a company.
Based on a above 6 debt ratios, we can see that Duke Energy has clever formula in regards to a debt ratios. Based on a formula indicated above, all of a ratios solely a money upsurge to debt ratio have been increasing, yet as they have usually somewhat augmenting no red flags are raised. Based on a clever formula from a ratios above, this indicates that Duke Energy has a ability to recompense for a debt, and is not on a verge of bankruptcy.
As Duke Energy’s bond rating now was downgraded a association perceived a “BBB+” rating by SP, this indicates that a association has a “Adequate ability to accommodate financial commitments, yet some-more theme to inauspicious mercantile conditions.”
The CAPM proceed for cost of equity states that shareholders need 3.48% over a prolonged duration of time on their equity to make it inestimable to deposit in a company. This calculation is so formed on a normal marketplace lapse between 1950 to 2011 during 7%.
The WACC calculation reveals that a association pays 3.86% on each dollar that it finances. As a stream WACC of Duke Energy is now 3.86% and a beta is low during 0.33, it implies that a association needs 3.86% on destiny investments and will have really low sensitivity relocating forward.
Based on a calculations above, a association has a sizeable volume of debt in comparison to a distance of a association yet currently, has a ability to make a debts payments, accommodate a taxation obligations and is not in risk of bankruptcy.
The research of Duke Energy’s debt and liabilities indicates a clever association with a sizeable volume of debt yet now has a ability to recompense for it. The research also reveals a association has had some increases in a debt ratios over a past 3 years yet also reveals that a association is really clever in regards to their debt ratios. The WACC reveals that Duke Energy also and has a ability to supplement destiny investments and resources during really low rates. Currently, Duke Energy has a ability to recompense for a debts, accommodate a taxation obligations, is not in risk of failure and has a event to gain on destiny investments with low risk.
Disclosure: I have no positions in any bonds mentioned, and no skeleton to trigger any positions within a subsequent 72 hours. we wrote this essay myself, and it expresses my possess opinions. we am not receiving remuneration for it (other than from Seeking Alpha). we have no business attribute with any association whose batch is mentioned in this article.
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