Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that New Fortress Energy Inc. (NASDAQ:NFE) does use debt in its business. But should shareholders be worried about its use of debt?
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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.
What Is New Fortress Energy’s Net Debt?
As you can see below, at the end of March 2021, New Fortress Energy had US$1.24b of debt, up from US$945.9m a year ago. Click the image for more detail. However, because it has a cash reserve of US$360.1m, its net debt is less, at about US$880.4m.
A Look At New Fortress Energy’s Liabilities
According to the last reported balance sheet, New Fortress Energy had liabilities of US$195.9m due within 12 months, and liabilities of US$1.35b due beyond 12 months. Offsetting these obligations, it had cash of US$360.1m as well as receivables valued at US$104.8m due within 12 months. So its liabilities total US$1.08b more than the combination of its cash and short-term receivables.
Since publicly traded New Fortress Energy shares are worth a total of US$8.06b, 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 New Fortress Energy can strengthen its balance sheet over time.
Over 12 months, New Fortress Energy reported revenue of US$523m, which is a gain of 124%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
While we can certainly appreciate New Fortress Energy’s revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$18m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn’t help that it burned through US$368m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt.