Broadwind Energy (NASDAQ:BWEN) Has Debt But No Earnings; Should You Worry?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Broadwind Energy, Inc. (NASDAQ:BWEN) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Broadwind Energy
What Is Broadwind Energy's Net Debt?
As you can see below, at the end of June 2019, Broadwind Energy had US$28.6m of debt, up from US$21.3m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.
A Look At Broadwind Energy's Liabilities
We can see from the most recent balance sheet that Broadwind Energy had liabilities of US$68.4m falling due within a year, and liabilities of US$18.6m due beyond that. Offsetting these obligations, it had cash of US$74.0k as well as receivables valued at US$20.3m due within 12 months. So it has liabilities totalling US$66.7m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the US$28.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Broadwind Energy 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 Broadwind Energy 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, Broadwind Energy reported revenue of US$141m, which is a gain of 24%. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
While we can certainly savour Broadwind Energy's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Indeed, it lost a very considerable US$7.5m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident 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$12m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Broadwind Energy insider transactions.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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