Health Check: How Prudently Does FuelCell Energy (NASDAQ:FCEL) Use Debt?

Simply Wall St
October 11, 2021
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, FuelCell Energy, Inc. (NASDAQ:FCEL) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for FuelCell Energy

How Much Debt Does FuelCell Energy Carry?

The image below, which you can click on for greater detail, shows that FuelCell Energy had debt of US$32.8m at the end of July 2021, a reduction from US$135.4m over a year. However, it does have US$468.6m in cash offsetting this, leading to net cash of US$435.8m.

NasdaqGM:FCEL Debt to Equity History October 12th 2021

How Healthy Is FuelCell Energy's Balance Sheet?

We can see from the most recent balance sheet that FuelCell Energy had liabilities of US$43.0m falling due within a year, and liabilities of US$110.6m due beyond that. Offsetting these obligations, it had cash of US$468.6m as well as receivables valued at US$22.9m due within 12 months. So it actually has US$337.9m more liquid assets than total liabilities.

This short term liquidity is a sign that FuelCell Energy could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, FuelCell Energy boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if FuelCell Energy 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.

In the last year FuelCell Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to US$73m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is FuelCell Energy?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months FuelCell Energy lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$125m of cash and made a loss of US$99m. Given it only has net cash of US$435.8m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 example, we've discovered 3 warning signs for FuelCell Energy that you should be aware of before investing here.

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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