Is SolarEdge Technologies (NASDAQ:SEDG) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, SolarEdge Technologies, Inc. (NASDAQ:SEDG) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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$628.1m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds US$680.6m in cash, so it actually has US$52.5m net cash.

How Healthy Is SolarEdge Technologies' Balance Sheet?

According to the last reported balance sheet, SolarEdge Technologies had liabilities of US$658.9m due within 12 months, and liabilities of US$1.27b due beyond 12 months. On the other hand, it had cash of US$680.6m and US$683.6m worth of receivables due within a year. So it has liabilities totalling US$562.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because SolarEdge Technologies is worth US$1.70b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, SolarEdge Technologies made a loss at the EBIT level, and saw its revenue drop to US$2.2b, which is a fall of 34%. That makes us nervous, to say the least.

So How Risky Is SolarEdge Technologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year SolarEdge Technologies had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$574m of cash and made a loss of US$261m. With only US$52.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that SolarEdge Technologies is showing 1 warning sign in our investment analysis , you should know about...

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.

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