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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Fluence Energy, Inc. (NASDAQ:FLNC) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

How Much Debt Does Fluence Energy Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Fluence Energy had debt of US$52.7m, up from US$21.6m in one year. But it also has US$411.8m in cash to offset that, meaning it has US$359.1m net cash.

A Look At Fluence Energy's Liabilities

The latest balance sheet data shows that Fluence Energy had liabilities of US$973.1m due within a year, and liabilities of US$25.0m falling due after that. On the other hand, it had cash of US$411.8m and US$356.6m worth of receivables due within a year. So its liabilities total US$229.8m more than the combination of its cash and short-term receivables.

Given Fluence Energy has a market capitalization of US$3.05b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Fluence Energy 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 it is future earnings, more than anything, that will determine Fluence Energy's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Fluence Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to US$2.2b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Fluence Energy?

While Fluence Energy lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$123m. 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. One positive is that Fluence Energy is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Fluence Energy , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com