Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Renewable Energy Group, Inc. (NASDAQ:REGI) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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 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.
How Much Debt Does Renewable Energy Group Carry?
The chart below, which you can click on for greater detail, shows that Renewable Energy Group had US$209.4m in debt in September 2019; about the same as the year before. However, it also had US$67.6m in cash, and so its net debt is US$141.9m.
How Strong Is Renewable Energy Group’s Balance Sheet?
The latest balance sheet data shows that Renewable Energy Group had liabilities of US$246.5m due within a year, and liabilities of US$147.4m falling due after that. On the other hand, it had cash of US$67.6m and US$83.7m worth of receivables due within a year. So its liabilities total US$242.7m more than the combination of its cash and short-term receivables.
Renewable Energy Group has a market capitalization of US$1.05b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. 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 Renewable Energy Group 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, Renewable Energy Group made a loss at the EBIT level, and saw its revenue drop to US$2.1b, which is a fall of 12%. We would much prefer see growth.
While Renewable Energy Group’s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$58m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn’t help that it burned through US$80m of cash over the last year. So in short it’s a really risky stock. 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. For instance, we’ve identified 1 warning sign for Renewable Energy Group that you should be aware of.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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