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.’ 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. Importantly, Green Plains Inc. (NASDAQ:GPRE) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Green Plains Carry?

The image below, which you can click on for greater detail, shows that at September 2021 Green Plains had debt of US$711.4m, up from US$526.0m in one year. However, it does have US$589.8m in cash offsetting this, leading to net debt of about US$121.6m.

How Strong Is Green Plains’ Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Green Plains had liabilities of US$404.3m due within 12 months and liabilities of US$591.3m due beyond that. Offsetting this, it had US$589.8m in cash and US$92.0m in receivables that were due within 12 months. So its liabilities total US$313.8m more than the combination of its cash and short-term receivables.

Since publicly traded Green Plains shares are worth a total of US$1.86b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Green Plains can strengthen its balance sheet over time.

Over 12 months, Green Plains reported revenue of US$2.5b, which is a gain of 16%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Green Plains had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$25m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$154m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky.