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.' 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. Importantly, SolarEdge Technologies, Inc. (NASDAQ:SEDG) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does SolarEdge Technologies Carry?

As you can see below, SolarEdge Technologies had US$638.7m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$689.8m in cash to offset that, meaning it has US$51.1m net cash.

How Strong Is SolarEdge Technologies' Balance Sheet?

We can see from the most recent balance sheet that SolarEdge Technologies had liabilities of US$566.8m falling due within a year, and liabilities of US$1.28b due beyond that. Offsetting these obligations, it had cash of US$689.8m as well as receivables valued at US$646.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$505.9m.

SolarEdge Technologies has a market capitalization of US$1.39b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, SolarEdge Technologies 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 ultimately the future profitability of the business will decide if SolarEdge Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, SolarEdge Technologies made a loss at the EBIT level, and saw its revenue drop to US$1.5b, which is a fall of 59%. To be frank that doesn't bode well.

So How Risky Is SolarEdge Technologies?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months SolarEdge Technologies lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$507m of cash and made a loss of US$512m. Given it only has net cash of US$51.1m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 instance, we've identified 1 warning sign for SolarEdge Technologies that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.