Green Plains (NASDAQ:GPRE) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Green Plains Inc. (NASDAQ:GPRE) makes use of debt. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Green Plains

What Is Green Plains's Debt?

As you can see below, at the end of September 2021, Green Plains had US$711.4m of debt, up from US$526.0m a year ago. Click the image for more detail. On the flip side, it has US$589.8m in cash leading to net debt of about US$121.6m.

How Healthy Is Green Plains' Balance Sheet?

The latest balance sheet data shows that Green Plains had liabilities of US$404.3m due within a year, and liabilities of US$591.3m falling due after that. Offsetting these obligations, it had cash of US$589.8m as well as receivables valued at US$92.0m due within 12 months. So its liabilities total US$313.8m more than the combination of its cash and short-term receivables.

Given Green Plains has a market capitalization of US$1.94b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Green Plains 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 Green Plains wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to US$2.5b. 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 Green Plains produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$25m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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$154m of cash over the last year. So suffice it to say we consider the stock very 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Green Plains (of which 1 is a bit unpleasant!) 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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