Is Fluence (ASX:FLC) Using Too Much Debt?

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 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 Fluence Corporation Limited (ASX:FLC) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that FLC is potentially overvalued!

What Is Fluence's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Fluence had debt of US$31.1m, up from US$22.0m in one year. But it also has US$37.5m in cash to offset that, meaning it has US$6.38m net cash.

How Strong Is Fluence's Balance Sheet?

We can see from the most recent balance sheet that Fluence had liabilities of US$85.5m falling due within a year, and liabilities of US$35.7m due beyond that. Offsetting these obligations, it had cash of US$37.5m as well as receivables valued at US$41.3m due within 12 months. So its liabilities total US$42.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Fluence is worth US$83.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

In the last year Fluence wasn't profitable at an EBIT level, but managed to grow its revenue by 63%, to US$124m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Fluence?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Fluence lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$15m of cash and made a loss of US$6.8m. Given it only has net cash of US$6.38m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Fluence may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Fluence (including 1 which doesn't sit too well with us) .

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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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.