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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that SMA Solar Technology AG (ETR:S92) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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

What Is SMA Solar Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 SMA Solar Technology had €22.3m of debt, an increase on none, over one year. But it also has €289.5m in cash to offset that, meaning it has €267.2m net cash.

A Look At SMA Solar Technology's Liabilities

We can see from the most recent balance sheet that SMA Solar Technology had liabilities of €647.1m falling due within a year, and liabilities of €273.4m due beyond that. On the other hand, it had cash of €289.5m and €278.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €352.4m.

Since publicly traded SMA Solar Technology shares are worth a total of €1.83b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

It was also good to see that despite losing money on the EBIT line last year, SMA Solar Technology turned things around in the last 12 months, delivering and EBIT of €192m. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SMA Solar Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent year, SMA Solar Technology recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While SMA Solar Technology does have more liabilities than liquid assets, it also has net cash of €267.2m. So we are not troubled with SMA Solar Technology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with SMA Solar Technology (including 2 which make us uncomfortable) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.