The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Clean Energy Fuels Corp. (NASDAQ:CLNE) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Clean Energy Fuels's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Clean Energy Fuels had US$262.0m of debt, an increase on US$144.9m, over one year. On the flip side, it has US$248.9m in cash leading to net debt of about US$13.1m.

How Strong Is Clean Energy Fuels' Balance Sheet?

According to the last reported balance sheet, Clean Energy Fuels had liabilities of US$143.1m due within 12 months, and liabilities of US$363.4m due beyond 12 months. Offsetting this, it had US$248.9m in cash and US$115.8m in receivables that were due within 12 months. So it has liabilities totalling US$141.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Clean Energy Fuels has a market capitalization of US$552.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Clean Energy Fuels's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Clean Energy Fuels had a loss before interest and tax, and actually shrunk its revenue by 15%, to US$397m. That's not what we would hope to see.

Caveat Emptor

Not only did Clean Energy Fuels's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$50m. 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. Another cause for caution is that is bled US$47m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Clean Energy Fuels you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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