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Why I’m steering clear of Infigen Energy Limited (ASX:IFN) shares

Infigen Energy Limited (ASX: IFN) is an active participant in the Australian energy market. It is a developer, owner and operator of renewable energy generation assets delivering energy solutions to Australian businesses and large retailers.

In the past 10 years, Infigen has eroded shareholder value through negative earnings of $0.14c per share resulting in book value diminishing by 54%. As such, since June 2008, share prices have fallen from approximately $1.50 to its current price of $0.72c.

Currently, with a market capital of $682 million, Infigen has a P/E ratio of 16 and a projected EPS of $0.04 for the 2018 financial year. Outlook for growth is non-existent with earnings per share for 2019 matching the previous year.

Furthermore, the Debt to Equity ratio is 1.36:1 suggesting that Infigen is attempting to purchase additional growth while interest rates are low. This has been a mild success in the last 3 years as total revenue has grown 46% and free cash flow increasing 71% to $0.12c per share.

This additional free cash flow has been used to service debt commitments. Since 2016, Infigen has reduced its debt by 52%. Additionally, in February this year, Infigen stated its commitment to debt reduction via a refinancing arrangement with Goldman Sachs.

This debt refinancing will provide Infigen with increased flexibility to take advantage of opportunities in the renewable energy sector. As wind is the lowest cost renewable energy technology that can be rolled out on a large scale, the potential for unaccounted growth is worth considering for investors.

Growth in the renewable energy sector appears probable with renewable energy targets and increased mainstream popularity. However, the clean energy council has stated that policy uncertainty has the potential to undermine growth in the coming years.

Foolish takeaway

I am a big fan (sorry) of Infigen Energy Limited. Unfortunately, due to its debt levels and inability to deliver returns despite being the lowest cost renewable energy technology, I’ll be avoiding this company until further notice.

If you are looking for exposure to the renewable energy sector, it might pay to have a look elsewhere….

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Motley Fool contributor Matt Breen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.