Adrian JohnsonTLDR:
SMA Solar Technology AG (ETR:S92) has a manageable level of debt and enough cash to offset it, which indicates that it can handle its debt responsibly.
German company SMA Solar Technology AG uses debt in its business operations. However, the more important question is whether the debt is creating too much risk.
Debt becomes a real problem if a company can’t easily pay it off, leading to lenders taking control of the business or dilution of shareholders. Too much debt can sink a company, but it can also be a useful tool in capital-intensive businesses.
SMA Solar Technology had €22.3m of debt as of September 2023, but it also had €289.5m in cash, resulting in a net cash position of €267.2m.
The company’s liabilities, due within a year, were €647.1m, but it also had €289.5m in cash and €278.6m worth of receivables due within a year. This means that its liabilities outweigh the sum of its cash and short-term receivables by €352.4m.
Despite having liabilities, SMA Solar Technology has more cash than debt, which suggests that it can manage its debt responsibly.
Although the company had a negative EBIT last year, it turned things around in the last 12 months, delivering a positive EBIT of €192m.
While the balance sheet is important when analyzing debt, the future profitability of the business will ultimately determine whether SMA Solar Technology can strengthen its balance sheet over time.
SMA Solar Technology’s free cash flow is weak, as it only converted 40% of its EBIT into free cash flow in the most recent year.
Overall, SMA Solar Technology has more liabilities than liquid assets but also has a net cash position.