Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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. We can see that Clean Energy Fuels Corp. (NASDAQ:CLNE) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.
What Is Clean Energy Fuels’s Net Debt?
The chart below, which you can click on for greater detail, shows that Clean Energy Fuels had US$86.8m in debt in March 2021; about the same as the year before. However, it does have US$146.2m in cash offsetting this, leading to net cash of US$59.4m.
How Healthy Is Clean Energy Fuels’ Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Clean Energy Fuels had liabilities of US$85.8m due within 12 months and liabilities of US$120.8m due beyond that. On the other hand, it had cash of US$146.2m and US$90.7m worth of receivables due within a year. So it actually has US$30.2m more liquid assets than total liabilities.
This state of affairs indicates that Clean Energy Fuels’ balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it’s hard to imagine that the US$1.63b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Succinctly put, Clean Energy Fuels boasts net cash, so it’s fair to say it does not have a heavy debt load! 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 Clean Energy Fuels can strengthen its balance sheet over time.
In the last year Clean Energy Fuels had a loss before interest and tax, and actually shrunk its revenue by 20%, to US$283m. We would much prefer see growth.
So How Risky Is Clean Energy Fuels?
While Clean Energy Fuels lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$56m. So taking that on face value, and considering the net cash situation, we don’t think that the stock is too risky in the near term. We’ll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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.