Here's Why SMA Solar Technology (ETR:S92) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that SMA Solar Technology AG (ETR:S92) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SMA Solar Technology

What Is SMA Solar Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that SMA Solar Technology had €15.3m of debt in March 2023, down from €25.5m, one year before. But it also has €258.4m in cash to offset that, meaning it has €243.1m net cash.

How Strong Is SMA Solar Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SMA Solar Technology had liabilities of €489.7m due within 12 months and liabilities of €262.0m due beyond that. On the other hand, it had cash of €258.4m and €196.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €296.5m.

Given SMA Solar Technology has a market capitalization of €3.38b, 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. While it does have liabilities worth noting, SMA Solar Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although SMA Solar Technology made a loss at the EBIT level, last year, it was also good to see that it generated €63m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SMA Solar Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While SMA Solar Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, SMA Solar Technology produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that SMA Solar Technology has €243.1m in net cash. So we are not troubled with SMA Solar Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for SMA Solar Technology you should be aware of, and 1 of them makes us a bit uncomfortable.

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.

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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.