Renewable Energy Group (NASDAQ:REGI) Has A Pretty Healthy Balance Sheet

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 note that Renewable Energy Group, Inc. (NASDAQ:REGI) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Renewable Energy Group

What Is Renewable Energy Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Renewable Energy Group had US$536.4m of debt, an increase on US$70.1m, over one year. But it also has US$863.1m in cash to offset that, meaning it has US$326.7m net cash.

How Strong Is Renewable Energy Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Renewable Energy Group had liabilities of US$217.3m due within 12 months and liabilities of US$565.4m due beyond that. Offsetting this, it had US$863.1m in cash and US$204.0m in receivables that were due within 12 months. So it can boast US$284.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Renewable Energy Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Renewable Energy Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Renewable Energy Group's saving grace is its low debt levels, because its EBIT has tanked 63% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Renewable Energy Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Renewable Energy Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, Renewable Energy Group produced sturdy free cash flow equating to 50% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Renewable Energy Group has net cash of US$326.7m, as well as more liquid assets than liabilities. So we don't have any problem with Renewable Energy Group's use of debt. 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 5 warning signs for Renewable Energy Group (of which 1 is significant!) you should know about.

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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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.
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