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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Sunnova Energy International Inc. (NYSE:NOVA) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for Sunnova Energy International

What Is Sunnova Energy International's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Sunnova Energy International had debt of US$4.15b, up from US$2.73b in one year. However, it does have US$215.4m in cash offsetting this, leading to net debt of about US$3.94b.

How Healthy Is Sunnova Energy International's Balance Sheet?

According to the last reported balance sheet, Sunnova Energy International had liabilities of US$387.7m due within 12 months, and liabilities of US$4.52b due beyond 12 months. Offsetting this, it had US$215.4m in cash and US$227.7m in receivables that were due within 12 months. So its liabilities total US$4.47b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$2.84b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Sunnova Energy International would probably need a major re-capitalization if its creditors were to demand repayment. 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 Sunnova Energy International'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 Sunnova Energy International wasn't profitable at an EBIT level, but managed to grow its revenue by 77%, to US$347m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Sunnova Energy International managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost US$49m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$960m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sunnova Energy International is showing 5 warning signs in our investment analysis , and 1 of those is a bit concerning...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.