Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Clean Energy Fuels Corp. (NASDAQ:CLNE) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Clean Energy Fuels’s Debt?
You can click the graphic below for the historical numbers, but it shows that Clean Energy Fuels had US$80.5m of debt in June 2019, down from US$239.9m, one year before. However, it does have US$107.5m in cash offsetting this, leading to net cash of US$27.0m.
How Strong Is Clean Energy Fuels’s Balance Sheet?
We can see from the most recent balance sheet that Clean Energy Fuels had liabilities of US$123.4m falling due within a year, and liabilities of US$63.3m due beyond that. Offsetting these obligations, it had cash of US$107.5m as well as receivables valued at US$70.9m due within 12 months. So it has liabilities totalling US$8.41m more than its cash and near-term receivables, combined.
Having regard to Clean Energy Fuels’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$468.8m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Clean Energy Fuels also has more cash than debt, so we’re pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Clean Energy Fuels can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Clean Energy Fuels made a loss at the EBIT level, and saw its revenue drop to US$324m, which is a fall of 5.9%. We would much prefer see growth.
So How Risky Is Clean Energy Fuels?
Although Clean Energy Fuels had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$665k. So taking that on face value, and considering the net cash situation, we don’t think that the stock is too risky in the near term. With revenue growth uninspiring, we’d really need to see some positive EBIT before mustering much enthusiasm for this business. For riskier companies like Clean Energy Fuels I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.