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Health Check: How Prudently Does Sunnova Energy International (NYSE:NOVA) Use Debt?

Simply Wall St

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Sunnova Energy International Inc. (NYSE:NOVA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

As you can see below, at the end of June 2019, Sunnova Energy International had US$1.25b of debt, up from US$833.5m a year ago. Click the image for more detail. However, it also had US$58.8m in cash, and so its net debt is US$1.20b.

NYSE:NOVA Historical Debt, October 25th 2019
NYSE:NOVA Historical Debt, October 25th 2019

A Look At Sunnova Energy International's Liabilities

According to the last reported balance sheet, Sunnova Energy International had liabilities of US$158.6m due within 12 months, and liabilities of US$1.24b due beyond 12 months. Offsetting this, it had US$58.8m in cash and US$27.7m in receivables that were due within 12 months. So its liabilities total US$1.32b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's US$886.0m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Sunnova Energy International'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 Sunnova Energy International wasn't profitable at an EBIT level, but managed to grow its revenue by29%, to US$117m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly savour Sunnova Energy International's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Indeed, it lost US$9.7m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$340m over the last twelve months. That means it's on the risky side of things. For riskier companies like Sunnova Energy International 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.