AES’s (AES) high debt could concern some investors. At the end of last year, AES had ~$18 billion in total debt and a “BB+” credit rating, just below investment grade.
As of December 31, AES’s net-debt-to-EBITDA ratio was 5.1x, close to its five-year average. Net-debt-to-EBITDA ratios show how many years it will take for a company to repay its debt using its EBITDA if its debt and EBITDA are constant. A stable leverage trend indicates that AES’s debt has mostly increased in proportion to its earnings.
In comparison, merchant power player NRG Energy (NRG) had a net-debt-to-EBITDA ratio of ~3x at the end of the fourth quarter, significantly lower than its five-year average of 7x. Its total debt was ~$6.0 billion.
Debt-to-equity ratios compare how much debt a company is using to finance its assets with its equity. AES’s debt-to-equity ratio on December 31 was 6.0x, significantly higher than the industry average. A higher ratio suggests higher debt-servicing costs.