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. As with many other companies Green Plains Inc. (NASDAQ:GPRE) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Green Plains's Debt?
The image below, which you can click on for greater detail, shows that Green Plains had debt of US$895.6m at the end of June 2019, a reduction from US$1.30b over a year. However, it also had US$193.3m in cash, and so its net debt is US$702.4m.
A Look At Green Plains's Liabilities
Zooming in on the latest balance sheet data, we can see that Green Plains had liabilities of US$716.8m due within 12 months and liabilities of US$429.4m due beyond that. Offsetting these obligations, it had cash of US$193.3m as well as receivables valued at US$121.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$831.3m.
This deficit casts a shadow over the US$313.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Green Plains would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Green Plains's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Green Plains actually shrunk its revenue by 13%, to US$3.3b. That's not what we would hope to see.
Not only did Green Plains's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$118m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized US$92m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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.
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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.