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. We can see that ReneSola Ltd (NYSE:SOL) does use debt in its business. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 ReneSola’s Debt?
The image below, which you can click on for greater detail, shows that ReneSola had debt of US$11.8m at the end of March 2021, a reduction from US$42.0m over a year. However, it does have US$301.0m in cash offsetting this, leading to net cash of US$289.2m.
How Strong Is ReneSola’s Balance Sheet?
We can see from the most recent balance sheet that ReneSola had liabilities of US$51.1m falling due within a year, and liabilities of US$58.9m due beyond that. Offsetting these obligations, it had cash of US$301.0m as well as receivables valued at US$36.0m due within 12 months. So it can boast US$227.0m more liquid assets than total liabilities.
This surplus strongly suggests that ReneSola has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that ReneSola has more cash than debt is arguably a good indication that 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 ReneSola’s ability to maintain a healthy balance sheet going forward.
In the last year ReneSola had a loss before interest and tax, and actually shrunk its revenue by 46%, to US$69m. To be frank that doesn’t bode well.
So How Risky Is ReneSola?
While ReneSola lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$9.1m. So when you consider it has net cash, along with the statutory profit, the stock probably isn’t as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we’re don’t find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt.