Would Green Plains (NASDAQ:GPRE) Be Better Off With Less Debt?

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.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Green Plains

What Is Green Plains's Debt?

As you can see below, Green Plains had US$742.5m of debt at June 2023, down from US$902.6m a year prior. On the flip side, it has US$312.9m in cash leading to net debt of about US$429.7m.

How Strong Is Green Plains' Balance Sheet?

We can see from the most recent balance sheet that Green Plains had liabilities of US$513.8m falling due within a year, and liabilities of US$583.2m due beyond that. On the other hand, it had cash of US$312.9m and US$133.6m worth of receivables due within a year. So it has liabilities totalling US$650.5m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Green Plains has a market capitalization of US$1.70b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 reported revenue of US$3.6b, which is a gain of 6.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Green Plains had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$184m 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. Another cause for caution is that is bled US$125m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like Green Plains I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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