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Canadian Solar: A Look at Leverage and Liquidity

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Debt profile

With outstanding total debt of $1,010 million at the end of 2014, First Solar (CSIQ) has maintained its debt levels at around the same amount since 2010. Short-term debt makes up the most significant proportion of the company’s debt (72%) as well as its total liabilities (43%). This line item mostly consists of borrowings from Chinese banks to fund operations—that is, working capital expenditures and capital expenditures. The company’s dependence on Chinese banks’ lending policies would pose a significant risk if these policies became less favorable towards solar companies in the future.

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The debt-to-equity ratio and its implications

Canadian Solar has a trailing-12-month debt-to-equity ratio of 0.37, which is similar to close peers Trina Solar (TSL) and ReneSola (SOL). In contrast, First Solar has a very low debt-to-equity ratio of 0.04. Canadian Solar has maintained a ratio of around 0.4 since 2013. In 2012, its ratio reached 0.74. The 2012 result was due to a deficit in retained earnings resulting from an industry-wide weak year. In 2010 and 2011, the company had a debt-to-equity ratio below 0.2.

More than 50% of all Canadian Solar’s short-term bank borrowings are secured by restricted cash, inventories, prepaid land use rights, property, plant, and equipment (PP&E), project assets, and bank notes. Most notably. they’re guaranteed by the company’s president and CEO, Dr. Shawn Qu. About 60% of the company’s long-term borrowings mature within the next two years. These long-term borrowings are secured by restricted cash, prepaid land use rights, PP&E, and project assets.

Liquidity

Taking a look at Canadian Solar’s quick ratio, at 0.38, we see that the company has a low ratio compared to its close peers. The quick ratio measures the company’s ability to pay off current liabilities with current assets limited to cash, cash equivalents, short-term investments, and accounts receivable.

The quick ratio is regarded as a refined measure of liquidity, as opposed to the current ratio. But in Canadian Solar’s case, the current ratio may be an appropriate measure of liquidity. In addition to cash, since the company’s short-term debt is secured by other assets, its debt situation may not be too big of a concern for investors. With a current ratio of 1.13, the company’s balance sheet looks stronger than Trina Solar’s and ReneSola’s, are currently 1 and 0.59, respectively.

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