SSE (LSE: SSE) (NASDAQOTH: SSEZY) has been in the headlines a lot over the last year. Indeed, comments made by politicians regarding the status of SSE’s regulator, Ofgem, have been a major reason why shares have underperformed the index over the last twelve months, with SSE down 3% and the FTSE 100 up 7% (at the time of writing).
However, is political risk not the only risk that shareholders should be concerned about? Or is SSE’s financial risk, in the form of high levels of borrowing, also becoming a problem?
Excessive debt?
With a debt to equity ratio of 110%, SSE has high levels of debt and it could be stated, at first glance, that its balance sheet carries too much debt. However, the nature of the business means that it is in a position to comfortably carry relatively high debt levels.
That’s because SSE’s revenue stream is very stable. Certainly, there remain risks surrounding future electricity price changes and the potential for prices to be frozen, but it is highly unlikely that SSE would be allowed to miss debt repayments or experience significant financial difficulty as a result of government intervention. Therefore, a greater degree of certainty than many FTSE 100 companies regarding future levels of income equates to an ability to carry more debt.
Furthermore, SSE seems to be servicing its current debt levels with adequate headroom. For instance, its interest coverage ratio (the number of times it could have paid interest on its debt using operating profit) was a healthy 3.4 in its most recent financial year. This is fairly comfortable and shows there is a degree of breathing space for SSE.
Looking Ahead
Of course, political risk remains a problem for SSE, with shares being marked down due to uncertainty surrounding what action the next UK government will take regarding the price of electricity. As mentioned, it is very unlikely that any government action would deliberately call into question the financial health of a major electricity supplier and so it appears as though SSE will continue to have sufficient headroom with which to make debt repayments. Indeed, the negative effects on the share price, caused by the political instability, could equate to a ‘buy’ for longer term investors.
