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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Sunrun Inc. (NASDAQ:RUN) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. 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.
How Much Debt Does Sunrun Carry?
As you can see below, at the end of March 2020, Sunrun had US$2.60b of debt, up from US$1.82b a year ago. Click the image for more detail. However, because it has a cash reserve of US$286.4m, its net debt is less, at about US$2.31b.
A Look At Sunrun's Liabilities
Zooming in on the latest balance sheet data, we can see that Sunrun had liabilities of US$474.8m due within 12 months and liabilities of US$3.85b due beyond that. On the other hand, it had cash of US$286.4m and US$73.3m worth of receivables due within a year. So it has liabilities totalling US$3.96b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the US$2.57b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Sunrun would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sunrun 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.
In the last year Sunrun wasn't profitable at an EBIT level, but managed to grow its revenue by 7.9%, to US$875m. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, Sunrun had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at US$239m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$1.2b over the last twelve months. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 5 warning signs for Sunrun (of which 2 are a bit concerning!) you should know about.
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. 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.
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