David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Renewable Energy Group, Inc. (NASDAQ:REGI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Renewable Energy Group

What Is Renewable Energy Group's Debt?

The image below, which you can click on for greater detail, shows that Renewable Energy Group had debt of US$43.9m at the end of March 2021, a reduction from US$240.9m over a year. But on the other hand it also has US$466.8m in cash, leading to a US$422.9m net cash position.

A Look At Renewable Energy Group's Liabilities

We can see from the most recent balance sheet that Renewable Energy Group had liabilities of US$194.4m falling due within a year, and liabilities of US$46.6m due beyond that. Offsetting this, it had US$466.8m in cash and US$152.0m in receivables that were due within 12 months. So it can boast US$377.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Renewable Energy Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Renewable Energy Group has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Renewable Energy Group if management cannot prevent a repeat of the 78% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Renewable Energy Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.