Would Green Plains (NASDAQ:GPRE) be better off with less debt?

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Green Plains Inc. (NASDAQ:GPRE) is in debt. But the more important question is: what risk does this debt create?

Why is debt risky?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for Green Plains

How much debt does Green Plains have?

As you can see below, at the end of March 2022, Green Plains had $903.8 million in debt, up from $773.4 million a year ago. Click on the image for more details. However, he has $534.1 million in cash to offset this, resulting in a net debt of approximately $369.7 million.

NasdaqGS:GPRE Debt to Equity June 30, 2022

A look at the responsibilities of Green Plains

We can see from the most recent balance sheet that Green Plains had liabilities of US$580.7 million due in one year, and liabilities of US$629.2 million beyond. In compensation for these obligations, it had cash of US$534.1 million as well as receivables valued at US$142.7 million and maturing within 12 months. Thus, its liabilities total $533.1 million more than the combination of its cash and short-term receivables.

This shortfall is not that bad as Green Plains is worth US$1.50 billion and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. But it is clear that it must be carefully examined whether he can manage his debt without dilution. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Green Plains can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Last year, Green Plains was not profitable on an EBIT level, but managed to increase its revenue by 66% to $3.1 billion. With a little luck, the company will be able to progress towards profitability.

Caveat Emptor

Even though Green Plains has managed to grow its revenue quite slickly, the harsh truth is that it is losing money on the EBIT line. Indeed, it lost $46 million in EBIT. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. Quite frankly, we think the track record falls short, although it could improve over time. Another reason for caution is that it has lost $339 million in negative free cash flow over the past twelve months. In short, it’s a really risky title. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 2 warning signs we spotted with Green Plains.

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.

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.

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