Does First Solar (NASDAQ:FSLR) Have A Healthy Balance Sheet?

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.' 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, First Solar, Inc. (NASDAQ:FSLR) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for First Solar

What Is First Solar's Net Debt?

You can click the graphic below for the historical numbers, but it shows that First Solar had US$175.2m of debt in June 2022, down from US$280.0m, one year before. But it also has US$1.85b in cash to offset that, meaning it has US$1.67b net cash.

How Healthy Is First Solar's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that First Solar had liabilities of US$803.6m due within 12 months and liabilities of US$720.0m due beyond that. On the other hand, it had cash of US$1.85b and US$489.9m worth of receivables due within a year. So it actually has US$811.5m more liquid assets than total liabilities.

This surplus suggests that First Solar has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that First Solar has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact First Solar's saving grace is its low debt levels, because its EBIT has tanked 75% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 First Solar'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, a company can only pay off debt with cold hard cash, not accounting profits. First Solar 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. During the last three years, First Solar burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case First Solar has US$1.67b in net cash and a decent-looking balance sheet. So while First Solar does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with First Solar .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.