Is First Solar (NASDAQ:FSLR) Using Debt In A Risky Way?

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

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for First Solar

What Is First Solar's Debt?

As you can see below, at the end of March 2023, First Solar had US$320.4m of debt, up from US$252.1m a year ago. Click the image for more detail. But on the other hand it also has US$2.27b in cash, leading to a US$1.95b net cash position.

A Look At First Solar's Liabilities

According to the last reported balance sheet, First Solar had liabilities of US$1.17b due within 12 months, and liabilities of US$1.52b due beyond 12 months. Offsetting these obligations, it had cash of US$2.27b as well as receivables valued at US$324.5m due within 12 months. So it has liabilities totalling US$100.1m more than its cash and near-term receivables, combined.

Having regard to First Solar's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$21.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, First Solar also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 First Solar'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, First Solar reported revenue of US$2.8b, which is a gain of 13%, 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 First Solar?

Although First Solar had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$42m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for First Solar you should know about.

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.