Is Sunnova Energy International (NYSE:NOVA) Using Too Much 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 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 Sunnova Energy International Inc. (NYSE:NOVA) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. 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. 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 Sunnova Energy International

How Much Debt Does Sunnova Energy International Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Sunnova Energy International had US$5.00b of debt, an increase on US$3.06b, over one year. However, because it has a cash reserve of US$419.7m, its net debt is less, at about US$4.58b.

How Healthy Is Sunnova Energy International's Balance Sheet?

According to the last reported balance sheet, Sunnova Energy International had liabilities of US$458.1m due within 12 months, and liabilities of US$5.44b due beyond 12 months. On the other hand, it had cash of US$419.7m and US$293.8m worth of receivables due within a year. So its liabilities total US$5.18b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$2.44b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Sunnova Energy International would likely require a major re-capitalisation if it had to pay its creditors today. 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 Sunnova Energy International 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 Sunnova Energy International wasn't profitable at an EBIT level, but managed to grow its revenue by 99%, to US$427m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Sunnova Energy International still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$87m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$1.2b in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Sunnova Energy International you should be aware of, and 1 of them makes us a bit uncomfortable.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.