Is Fluence (ASX:FLC) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Fluence Corporation Limited (ASX:FLC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Fluence

What Is Fluence's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Fluence had US$17.8m of debt in December 2023, down from US$31.3m, one year before. However, its balance sheet shows it holds US$28.3m in cash, so it actually has US$10.4m net cash.

A Look At Fluence's Liabilities

We can see from the most recent balance sheet that Fluence had liabilities of US$77.6m falling due within a year, and liabilities of US$3.36m due beyond that. Offsetting these obligations, it had cash of US$28.3m as well as receivables valued at US$35.3m due within 12 months. So it has liabilities totalling US$17.3m more than its cash and near-term receivables, combined.

Given Fluence has a market capitalization of US$99.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Fluence boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Fluence's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Fluence made a loss at the EBIT level, and saw its revenue drop to US$70m, which is a fall of 41%. To be frank that doesn't bode well.

So How Risky Is Fluence?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Fluence had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$21m of cash and made a loss of US$15m. But at least it has US$10.4m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Fluence (1 is concerning!) that you should be aware of before investing here.

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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.