Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Fluence Corporation Limited (ASX:FLC) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Fluence's Net Debt?
As you can see below, at the end of December 2020, Fluence had US$21.7m of debt, up from US$2.91m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$46.4m in cash, so it actually has US$24.7m net cash.
How Healthy Is Fluence's Balance Sheet?
According to the last reported balance sheet, Fluence had liabilities of US$81.6m due within 12 months, and liabilities of US$42.7m due beyond 12 months. Offsetting this, it had US$46.4m in cash and US$38.5m in receivables that were due within 12 months. So it has liabilities totalling US$39.4m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Fluence has a market capitalization of US$109.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Fluence also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Fluence's ability to maintain a healthy balance sheet going forward. 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, Fluence reported revenue of US$97m, which is a gain of 61%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Fluence?
Although Fluence had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$21m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that Fluence is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Fluence insider transactions.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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