Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies SolarEdge Technologies, Inc. (NASDAQ:SEDG) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is SolarEdge Technologies's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2021 SolarEdge Technologies had US$621.7m of debt, an increase on US$590.2m, over one year. However, its balance sheet shows it holds US$697.8m in cash, so it actually has US$76.1m net cash.
A Look At SolarEdge Technologies' Liabilities
According to the last reported balance sheet, SolarEdge Technologies had liabilities of US$525.2m due within 12 months, and liabilities of US$1.06b due beyond 12 months. On the other hand, it had cash of US$697.8m and US$590.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$293.4m.
This state of affairs indicates that SolarEdge Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$17.3b company is struggling for cash, we still think it's worth monitoring its 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 50%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SolarEdge Technologies can strengthen its balance sheet over time. 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. While SolarEdge Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, SolarEdge Technologies recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
We could understand if investors are concerned about SolarEdge Technologies's liabilities, but we can be reassured by the fact it has has net cash of US$76.1m. And we liked the look of last year's 50% year-on-year EBIT growth. So is SolarEdge Technologies's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. 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.
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.
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.