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SMA Solar Technology (ETR:S92) May Be Weighed Down By Its Debt

Simply Wall St

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 SMA Solar Technology AG (ETR:S92) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SMA Solar Technology

What Is SMA Solar Technology's Net Debt?

As you can see below, at the end of March 2019, SMA Solar Technology had €42.3m of debt, up from €19.9m a year ago. Click the image for more detail. However, it does have €303.4m in cash offsetting this, leading to net cash of €261.1m.

XTRA:S92 Historical Debt, July 26th 2019
XTRA:S92 Historical Debt, July 26th 2019

How Healthy Is SMA Solar Technology's Balance Sheet?

According to the last reported balance sheet, SMA Solar Technology had liabilities of €297.1m due within 12 months, and liabilities of €267.2m due beyond 12 months. Offsetting these obligations, it had cash of €303.4m as well as receivables valued at €149.3m due within 12 months. So its liabilities total €111.5m more than the combination of its cash and short-term receivables.

Given SMA Solar Technology has a market capitalization of €805.7m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, SMA Solar Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 SMA Solar Technology'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.

In the last year SMA Solar Technology actually shrunk its revenue by 17%, to €746m. We would much prefer see growth.

So How Risky Is SMA Solar Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that SMA Solar Technology had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through €108m of cash and made a loss of €189m. With only €303m 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. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how SMA Solar Technology's profit, revenue, and operating cashflow have changed over the last few years.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.