Capstone Green Energy (NASDAQ:CGRN) Has Debt But No Earnings; Should You Worry?

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. We can see that Capstone Green Energy Corporation (NASDAQ:CGRN) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Capstone Green Energy

What Is Capstone Green Energy's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Capstone Green Energy had debt of US$57.2m, up from US$51.5m in one year. On the flip side, it has US$23.8m in cash leading to net debt of about US$33.5m.

How Strong Is Capstone Green Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Capstone Green Energy had liabilities of US$41.0m due within 12 months and liabilities of US$64.2m due beyond that. Offsetting these obligations, it had cash of US$23.8m as well as receivables valued at US$18.2m due within 12 months. So its liabilities total US$63.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$41.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Capstone Green Energy would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Capstone Green Energy 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, Capstone Green Energy reported revenue of US$76m, which is a gain of 5.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Capstone Green Energy produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$13m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$21m over the last twelve months. That means it's on the risky side of things. 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 instance, we've identified 2 warning signs for Capstone Green Energy that you should be aware of.

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.