Does SMA Solar Technology (ETR:S92) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, SMA Solar Technology AG (ETR:S92) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 SMA Solar Technology

How Much Debt Does SMA Solar Technology Carry?

The image below, which you can click on for greater detail, shows that at June 2022 SMA Solar Technology had debt of €18.6m, up from €11.8m in one year. But on the other hand it also has €183.1m in cash, leading to a €164.4m net cash position.

How Healthy Is SMA Solar Technology's Balance Sheet?

The latest balance sheet data shows that SMA Solar Technology had liabilities of €345.3m due within a year, and liabilities of €278.9m falling due after that. On the other hand, it had cash of €183.1m and €174.7m worth of receivables due within a year. So it has liabilities totalling €266.5m more than its cash and near-term receivables, combined.

Given SMA Solar Technology has a market capitalization of €1.87b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, SMA Solar Technology boasts net cash, so it's fair to say it does not have a heavy debt load! 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 SMA Solar Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, SMA Solar Technology made a loss at the EBIT level, and saw its revenue drop to €967m, which is a fall of 3.3%. We would much prefer see growth.

So How Risky Is SMA Solar Technology?

Although SMA Solar Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €12m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 SMA Solar Technology's profit, revenue, and operating cashflow have changed over the last few years.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.