Alliant Energy's ROE: A Double-Edged Sword of Leverage and Returns

Alliant Energy (LNT) has posted a robust return on equity (ROE) of 11.8% for Q2 2025, outpacing its 2024 average of 9.83% and the Electric Utilities sector’s 9.5% benchmark [5]. This 7.09% year-over-year improvement suggests strong operational efficiency, but the company’s reliance on debt to amplify returns raises critical questions about sustainability. With a debt-to-equity (D/E) ratio of 1.58 as of June 2025 [2], Alliant’s capital structure is heavily leveraged, even as the sector average D/E ratio stands at 1.77 [3]. This juxtaposition of high ROE and elevated leverage demands closer scrutiny.

The ROE Paradox: Efficiency or Leverage?

Alliant’s ROE of 12% for the trailing twelve months (TTM) is calculated using $832 million in net income and $7.1 billion in shareholders’ equity [2]. While this exceeds the industry average, it also reflects a strategic use of debt to boost returns. Utilities typically employ high leverage due to their capital-intensive nature, but Alliant’s D/E ratio has surged from 117.7% to 158.3% over five years [4], signaling a shift toward riskier financing. The company’s net debt-to-EBITDA ratio of 6.1 [1] further underscores its heavy borrowing, with EBIT covering interest expenses just 2.1 times [1]. These metrics suggest that while Alliant’s ROE is impressive, it is partially propped up by debt rather than organic efficiency gains.

Credit Downgrade and Sector Context

A recent downgrade by S&P Global Ratings highlights the risks of Alliant’s leverage. The parent company, Alliant Energy Corp. (AEC), saw its FFO-to-debt ratio fall to 13.4% in 2024, below S&P’s 15% threshold for maintaining investment-grade ratings [4]. While the stable outlook assumes AEC will keep its FFO-to-debt ratio above 13%, this narrow margin leaves little room for error. For context, the sector’s average D/E ratio of 1.77 [3] indicates that Alliant’s leverage is relatively moderate compared to peers, but its interest coverage ratio of 2.1x [1] lags behind the sector’s typical 3–4x, suggesting weaker liquidity buffers.

Sustainability Assessment: Balancing Risk and Reward

Alliant’s regulated utility operations provide a stable revenue base, supported by favorable regulatory jurisdictions and above-average ROE [4]. However, its capital-intensive projects—such as grid modernization and renewable energy investments—require sustained borrowing, which could strain its balance sheet. The recent S&P downgrade serves as a cautionary signal: while the company’s excellent business risk profile mitigates some concerns, its financial flexibility is constrained by debt.

For investors, the key question is whether Alliant can maintain its ROE without compromising creditworthiness. A D/E ratio of 1.58 is manageable in a low-interest-rate environment but could become problematic if borrowing costs rise. The company’s ability to fund capital expenditures without further debt accumulation will be critical.

Conclusion

Alliant Energy’s ROE is a testament to its operational strength, but its sustainability hinges on prudent debt management. While the company’s leverage is in line with sector norms, the recent credit downgrade and weak interest coverage ratios highlight vulnerabilities. Investors should monitor Alliant’s capital allocation decisions and its capacity to service debt amid rising interest rates. For now, the ROE appears inflated by leverage rather than pure efficiency, making it a high-risk, high-reward proposition.

Source:
[1] These 4 Measures Indicate That Alliant Energy (NASDAQ:LNT) Is Using Debt Extensively [https://simplywall.st/stocks/us/utilities/nasdaq-lnt/alliant-energy/news/these-4-measures-indicate-that-alliant-energy-nasdaqlnt-is-u]
[2] A Closer Look At Alliant Energy Corporation's (NASDAQ:LNT ... [https://ca.finance.yahoo.com/news/closer-look-alliant-energy-corporations-134619539.html]
[3] Utilities Sector Financial Strength Information [https://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?s=1200]
[4] Alliant Energy Corp. credit rating downgraded due to weak financial metrics [https://www.investing.com/news/stock-market-news/alliant-energy-corp-credit-rating-downgraded-due-to-weak-financial-metrics-sp-global-93CH-3910605]