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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. We can see that First Solar, Inc. (NASDAQ:FSLR) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is First Solar’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 First Solar had US$585.5m of debt, an increase on US$478.3m, over one year. However, its balance sheet shows it holds US$2.12b in cash, so it actually has US$1.53b net cash.
A Look At First Solar’s Liabilities
According to the last reported balance sheet, First Solar had liabilities of US$836.5m due within 12 months, and liabilities of US$1.29b due beyond 12 months. Offsetting this, it had US$2.12b in cash and US$708.6m in receivables that were due within 12 months. So it actually has US$698.0m more liquid assets than total liabilities.
This short term liquidity is a sign that First Solar could probably pay off its debt with ease, as its balance sheet is far from stretched. Given that First Solar has more cash than debt, we’re pretty confident it can manage its debt safely. 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 First Solar’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.
Over 12 months, First Solar saw its revenue drop to US$2.2b, which is a fall of 16%. That’s not what we would hope to see.
So How Risky Is First Solar?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that First Solar had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$1.3b of cash and made a loss of US$6.2m. But at least it has US$2.1b on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn’t seem overly risky, at the moment, but we’re always cautious until we see the positive free cash flow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how First Solar’s profit, revenue, and operating cashflow have changed over the last few years.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.