Is FuelCell Energy (NASDAQ:FCEL) 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 FuelCell Energy, Inc. (NASDAQ:FCEL) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for FuelCell Energy

What Is FuelCell Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that as of July 2022 FuelCell Energy had US$35.5m of debt, an increase on US$32.8m, over one year. But it also has US$456.5m in cash to offset that, meaning it has US$421.0m net cash.

A Look At FuelCell Energy's Liabilities

The latest balance sheet data shows that FuelCell Energy had liabilities of US$80.5m due within a year, and liabilities of US$104.2m falling due after that. On the other hand, it had cash of US$456.5m and US$22.6m worth of receivables due within a year. So it actually has US$294.3m more liquid assets than total liabilities.

This excess liquidity suggests that FuelCell Energy is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that FuelCell Energy has more cash than debt is arguably a good indication that 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 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.

Over 12 months, FuelCell Energy reported revenue of US$105m, which is a gain of 45%, 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 FuelCell Energy?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that FuelCell Energy had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$166m of cash and made a loss of US$128m. Given it only has net cash of US$421.0m, the company may need to raise more capital if it doesn't reach break-even soon. FuelCell Energy's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. To that end, you should be aware of the 2 warning signs we've spotted with FuelCell Energy .

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.