Would Capstone Green Energy (NASDAQ:CGRN) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Capstone Green Energy Corporation (NASDAQ:CGRN) does carry debt. But should shareholders be worried about its use of debt?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Capstone Green Energy

How Much Debt Does Capstone Green Energy Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Capstone Green Energy had US$51.5m of debt, an increase on US$30.7m, over one year. On the flip side, it has US$38.3m in cash leading to net debt of about US$13.3m.

How Healthy Is Capstone Green Energy's Balance Sheet?

We can see from the most recent balance sheet that Capstone Green Energy had liabilities of US$33.8m falling due within a year, and liabilities of US$57.8m due beyond that. Offsetting these obligations, it had cash of US$38.3m as well as receivables valued at US$25.4m due within 12 months. So its liabilities total US$28.0m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Capstone Green Energy is worth US$65.2m, 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. 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 Capstone Green Energy's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Capstone Green Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to US$72m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Capstone Green Energy still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$18m at the EBIT level. 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. However, it doesn't help that it burned through US$22m of cash over the last year. So in short it's a really risky stock. 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. We've identified 3 warning signs with Capstone Green Energy , and understanding them should be part of your investment process.

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.