Solar Innovation (WSE:SIN) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Solar Innovation S.A. (WSE:SIN) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Solar Innovation

What Is Solar Innovation's Debt?

As you can see below, at the end of September 2021, Solar Innovation had zł8.95m of debt, up from zł461.0k a year ago. Click the image for more detail. However, it does have zł1.20m in cash offsetting this, leading to net debt of about zł7.75m.

A Look At Solar Innovation's Liabilities

According to the last reported balance sheet, Solar Innovation had liabilities of zł5.55m due within 12 months, and liabilities of zł7.87m due beyond 12 months. Offsetting this, it had zł1.20m in cash and zł2.59m in receivables that were due within 12 months. So its liabilities total zł9.64m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Solar Innovation has a market capitalization of zł30.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Solar Innovation's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Solar Innovation wasn't profitable at an EBIT level, but managed to grow its revenue by 276%, to zł15m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

While we can certainly appreciate Solar Innovation's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping zł3.0m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through zł3.6m of cash over the last year. So suffice it to say we consider the stock very 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. For example, we've discovered 4 warning signs for Solar Innovation (2 are significant!) that you should be aware of before investing here.

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.