Does SolarEdge Technologies (NASDAQ:SEDG) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, SolarEdge Technologies, Inc. (NASDAQ:SEDG) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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 SolarEdge Technologies

What Is SolarEdge Technologies's Debt?

The chart below, which you can click on for greater detail, shows that SolarEdge Technologies had US$626.6m in debt in September 2023; about the same as the year before. But it also has US$1.03b in cash to offset that, meaning it has US$401.8m net cash.

How Healthy Is SolarEdge Technologies' Balance Sheet?

We can see from the most recent balance sheet that SolarEdge Technologies had liabilities of US$876.7m falling due within a year, and liabilities of US$1.28b due beyond that. Offsetting this, it had US$1.03b in cash and US$1.12b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to SolarEdge Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$4.35b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, SolarEdge Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that SolarEdge Technologies has boosted its EBIT by 81%, thus reducing the spectre of future debt repayments. 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 SolarEdge Technologies'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. SolarEdge Technologies 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, SolarEdge Technologies 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 look at a company's total liabilities, it is very reassuring that SolarEdge Technologies has US$401.8m in net cash. And we liked the look of last year's 81% year-on-year EBIT growth. So we don't have any problem with SolarEdge Technologies's use of debt. There's no doubt that we learn most about debt from the balance sheet. 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 2 warning signs for SolarEdge Technologies you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.