Is Sunrun (NASDAQ:RUN) Using Too Much Debt?
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. Importantly, Sunrun Inc. (NASDAQ:RUN) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Sunrun
How Much Debt Does Sunrun Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Sunrun had US$1.97b of debt, an increase on US$1.78b, over one year. However, it does have US$299.5m in cash offsetting this, leading to net debt of about US$1.67b.
How Strong Is Sunrun's Balance Sheet?
We can see from the most recent balance sheet that Sunrun had liabilities of US$637.9m falling due within a year, and liabilities of US$3.08b due beyond that. Offsetting this, it had US$299.5m in cash and US$77.8m in receivables that were due within 12 months. So its liabilities total US$3.34b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$1.85b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt After all, Sunrun 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 it is future earnings, more than anything, that will determine Sunrun'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 Sunrun wasn't profitable at an EBIT level, but managed to grow its revenue by38%, to US$844m. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though Sunrun managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$137m. 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 burned through US$925m in negative free cash flow over the last year. That means it's on the risky side of things. For riskier companies like Sunrun 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.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.
