Is SolarEdge Technologies (NASDAQ:SEDG) A Risky Investment?

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. As with many other companies SolarEdge Technologies, Inc. (NASDAQ:SEDG) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SolarEdge Technologies

What Is SolarEdge Technologies's Net Debt?

The chart below, which you can click on for greater detail, shows that SolarEdge Technologies had US$625.2m in debt in March 2023; about the same as the year before. But it also has US$1.14b in cash to offset that, meaning it has US$513.5m 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$900.0m falling due within a year, and liabilities of US$1.25b due beyond that. Offsetting these obligations, it had cash of US$1.14b as well as receivables valued at US$1.17b due within 12 months. So it actually has US$167.1m more liquid assets than 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$14.9b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that SolarEdge Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that SolarEdge Technologies has boosted its EBIT by 76%, thus reducing the spectre of future debt repayments. 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Considering the last three years, SolarEdge Technologies actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case SolarEdge Technologies has US$513.5m in net cash and a decent-looking balance sheet. And we liked the look of last year's 76% year-on-year EBIT growth. So we are not troubled with SolarEdge Technologies's debt use. 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. Case in point: We've spotted 1 warning sign for SolarEdge Technologies you should be aware of.

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.