Here's Why First Solar (NASDAQ:FSLR) Can Manage Its Debt Responsibly
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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that First Solar, Inc. (NASDAQ:FSLR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for First Solar
What Is First Solar's Net Debt?
The image below, which you can click on for greater detail, shows that First Solar had debt of US$239.9m at the end of December 2021, a reduction from US$279.2m over a year. But it also has US$1.83b in cash to offset that, meaning it has US$1.59b net cash.
How Healthy Is First Solar's Balance Sheet?
We can see from the most recent balance sheet that First Solar had liabilities of US$726.9m falling due within a year, and liabilities of US$727.3m due beyond that. Offsetting this, it had US$1.83b in cash and US$454.7m in receivables that were due within 12 months. So it can boast US$826.6m more liquid assets than total liabilities.
This short term liquidity is a sign that First Solar could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that First Solar has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, First Solar grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. 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 First Solar'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. First Solar 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, First Solar burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that First Solar has net cash of US$1.59b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 32% over the last year. So we are not troubled with First Solar's debt use. 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. For example - First Solar has 1 warning sign we think you should be aware of.
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.
