Does GreenPower Motor (CVE:GPV) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, GreenPower Motor Company Inc. (CVE:GPV) does carry 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for GreenPower Motor

What Is GreenPower Motor's Debt?

The image below, which you can click on for greater detail, shows that GreenPower Motor had debt of US$10.0m at the end of September 2023, a reduction from US$11.0m over a year. However, it also had US$1.99m in cash, and so its net debt is US$8.02m.

How Healthy Is GreenPower Motor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GreenPower Motor had liabilities of US$22.6m due within 12 months and liabilities of US$10.4m due beyond that. Offsetting these obligations, it had cash of US$1.99m as well as receivables valued at US$8.42m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$22.6m.

GreenPower Motor has a market capitalization of US$72.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if GreenPower Motor 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, GreenPower Motor reported revenue of US$54m, which is a gain of 155%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, GreenPower Motor still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$13m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$3.4m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. Be aware that GreenPower Motor is showing 3 warning signs in our investment analysis , you should know about...

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.