Is Emeren Group (NYSE:SOL) Using Debt Sensibly?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Emeren Group Ltd (NYSE:SOL) does carry debt. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Emeren Group

What Is Emeren Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Emeren Group had US$23.5m of debt, an increase on US$56.0k, over one year. However, its balance sheet shows it holds US$76.7m in cash, so it actually has US$53.2m net cash.

How Healthy Is Emeren Group's Balance Sheet?

According to the last reported balance sheet, Emeren Group had liabilities of US$43.7m due within 12 months, and liabilities of US$61.4m due beyond 12 months. Offsetting this, it had US$76.7m in cash and US$79.1m in receivables that were due within 12 months. So it actually has US$50.7m more liquid assets than total liabilities.

It's good to see that Emeren Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Emeren Group has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Emeren Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Emeren Group reported revenue of US$71m, which is a gain of 17%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Emeren Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Emeren Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$85m of cash and made a loss of US$3.2m. With only US$53.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Emeren Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.