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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.' 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. We can see that SolarEdge Technologies, Inc. (NASDAQ:SEDG) does use debt in its business. But is this debt a concern to shareholders?
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. 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. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is SolarEdge Technologies's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 SolarEdge Technologies had US$576.1m of debt, an increase on US$21.0m, over one year. However, it does have US$1.18b in cash offsetting this, leading to net cash of US$602.6m.
How Healthy Is SolarEdge Technologies's Balance Sheet?
We can see from the most recent balance sheet that SolarEdge Technologies had liabilities of US$382.5m falling due within a year, and liabilities of US$863.7m due beyond that. Offsetting these obligations, it had cash of US$1.18b as well as receivables valued at US$183.1m due within 12 months. So it actually has US$115.6m more liquid assets than total liabilities.
Having regard to SolarEdge Technologies's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$15.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, SolarEdge Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that SolarEdge Technologies grew its EBIT by 14% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, SolarEdge Technologies generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
While it is always sensible to investigate a company's debt, in this case SolarEdge Technologies has US$602.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in US$155m. So we don't think SolarEdge Technologies's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for SolarEdge Technologies you should be aware of.
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.
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. 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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