Is Broadwind (NASDAQ:BWEN) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Broadwind, Inc. (NASDAQ:BWEN) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Broadwind

What Is Broadwind's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Broadwind had US$8.31m of debt, an increase on US$6.85m, over one year. However, it does have US$12.7m in cash offsetting this, leading to net cash of US$4.42m.

How Strong Is Broadwind's Balance Sheet?

The latest balance sheet data shows that Broadwind had liabilities of US$70.2m due within a year, and liabilities of US$28.1m falling due after that. Offsetting this, it had US$12.7m in cash and US$19.0m in receivables that were due within 12 months. So it has liabilities totalling US$66.6m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$82.2m, so it does suggest shareholders should keep an eye on Broadwind's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Broadwind 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 ultimately the future profitability of the business will decide if Broadwind can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Broadwind reported revenue of US$177m, which is a gain of 21%, 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.

So How Risky Is Broadwind?

While Broadwind lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$14m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Broadwind shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Broadwind that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.