Is Green Plains (NASDAQ:GPRE) A Risky Investment?

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. We can see that Green Plains Inc. (NASDAQ:GPRE) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Green Plains

What Is Green Plains's Net Debt?

The image below, which you can click on for greater detail, shows that Green Plains had debt of US$556.2m at the end of September 2024, a reduction from US$653.6m over a year. However, it also had US$227.5m in cash, and so its net debt is US$328.7m.

A Look At Green Plains' Liabilities

Zooming in on the latest balance sheet data, we can see that Green Plains had liabilities of US$316.1m due within 12 months and liabilities of US$504.9m due beyond that. On the other hand, it had cash of US$227.5m and US$75.5m worth of receivables due within a year. So its liabilities total US$518.1m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$623.2m, so it does suggest shareholders should keep an eye on Green Plains' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Green Plains made a loss at the EBIT level, and saw its revenue drop to US$2.6b, which is a fall of 26%. That makes us nervous, to say the least.

Caveat Emptor

While Green Plains's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$18m. 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. For example, we would not want to see a repeat of last year's loss of US$20m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Green Plains you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.