Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Sunnova Energy International Inc. (NYSE:NOVA) uses debt. But the more important question is: what risk does this debt create?
What risk does debt carry?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Sunnova Energy International
What is Sunnova Energy International’s debt?
As you can see below, at the end of September 2021, Sunnova Energy International had $3.06 billion in debt, up from $1.93 billion a year ago. Click on the image for more details. However, he also had $408.2 million in cash, so his net debt is $2.65 billion.
How strong is Sunnova Energy International’s balance sheet?
We can see from the most recent balance sheet that Sunnova Energy International had liabilities of US$263.2 million due in one year, and liabilities of US$3.31 billion due beyond. In return, he had $408.2 million in cash and $102.8 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $3.06 billion.
The deficiency here weighs heavily on the $1.94 billion business itself, like a child struggling under the weight of a huge backpack full of books, his gym gear and a trumpet. . So we definitely think shareholders need to watch this one closely. After all, Sunnova Energy International would likely need a major recapitalization if it were to pay its creditors today. There is no doubt that we learn the 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 in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, Sunnova Energy International was not profitable in terms of EBIT, but managed to increase its turnover by 37%, to 215 million dollars. With a little luck, the company will be able to progress towards profitability.
While we can certainly appreciate Sunnova Energy International’s revenue growth, its earnings before interest and tax (EBIT) loss is less than ideal. To be precise, the EBIT loss amounted to 54 million US dollars. Considering that alongside the liabilities mentioned above, we are nervous about the business. It would have to quickly improve its functioning so that we are interested in it. Not least because it had negative free cash flow of US$659 million over the last twelve months. So suffice it to say that we consider the stock to be risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 4 warning signs for Sunnova Energy International you should know, and one of them makes us a little uneasy.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.