SMA Solar Technology (ETR:S92) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 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?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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?

As you can see below, at the end of June 2023, SMA Solar Technology had €6.18m of debt, up from €21.0k a year ago. Click the image for more detail. But on the other hand it also has €298.6m in cash, leading to a €292.5m net cash position.

A Look At SMA Solar Technology's Liabilities

We can see from the most recent balance sheet that SMA Solar Technology had liabilities of €599.2m falling due within a year, and liabilities of €265.8m due beyond that. Offsetting this, it had €298.6m in cash and €212.0m in receivables that were due within 12 months. So its liabilities total €354.4m more than the combination of its cash and short-term receivables.

Given SMA Solar Technology has a market capitalization of €2.07b, it's hard to believe these liabilities pose much 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 €127m. There's no doubt that we learn most about debt from the balance sheet. 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 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While SMA Solar Technology does have more liabilities than liquid assets, it also has net cash of €292.5m. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in €90m. So we don't think SMA Solar Technology's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for SMA Solar Technology you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.