Here's Why GreenPower Motor (CVE:GPV) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for GreenPower Motor

How Much Debt Does GreenPower Motor Carry?

The image below, which you can click on for greater detail, shows that at September 2019 GreenPower Motor had debt of US$9.61m, up from US$6.08m in one year. However, it also had US$335.3k in cash, and so its net debt is US$9.28m.

A Look At GreenPower Motor's Liabilities

The latest balance sheet data shows that GreenPower Motor had liabilities of US$8.08m due within a year, and liabilities of US$4.49m falling due after that. Offsetting this, it had US$335.3k in cash and US$2.25m in receivables that were due within 12 months. So its liabilities total US$9.97m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because GreenPower Motor is worth US$25.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine GreenPower Motor'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, GreenPower Motor reported revenue of US$11m, which is a gain of 93%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly savour GreenPower Motor's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Indeed, it lost a very considerable US$2.6m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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$6.7m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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 GreenPower Motor insider transactions.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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