Canadian Solar Has a Debt Problem: Time to Worry?

Despite the recent setbacks in the solar market—such as the bankruptcy of Sunedison Inc (SUNE) and the underperformance of several companies—the sector is growing at fast rate. Canadian Solar Inc. (CSIQ) is no exception to the downtrend, but the underlying financials are looking quite strong.

In the most recent quarter, Canadian Solar posted earnings per share of $0.68, $0.31 better than the average analysts’ estimate. Revenue came in at $806 million, beating the consensus by $88 million.
That figure represents a surge of approximately 27% compared to last year, which is impressive.

Solar sector is still going strong

The solar sector is growing at a rapid pace around the globe and there is no sign of an imminent slowdown. According to Mercom Capital Group, global solar installations will reach 64.7 GW this year. China, Japan, and the U.S will account for approximately two-thirds of the worldwide market.

Though China is anticipated to continue leading the worldwide PV market, the United States will display the strongest growth this year.
Canadian Solar Has a Debt Problem: Time to Worry?
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This is due to the the Federal ITC expiration, which manufacturers had formerly factored into their business plans this year (prior to the five-year postponement received in December 2015). Moreover, it is likely that the U.S will outdo Japan as the second largest solar market, surpassing the expected 10 GW mark.

Apart from this positive macro trend, in the prior three years, Canadian Solar has achieved huge profits from developing projects in Canada, where it holds a leading position among the top qualified bidders. Recently, the company also received financing for 21 MW of projects in Japan.

In addition, Canadian Solar also won a 63 MW solar power plant in Mexico. These deals outside the United States and Canada, where the company has thus far been dependent on demand for its solar projects, will help it grow at a faster pace.

Buy the fear

With a current ratio of 0.8 times and debt to equity ratio of 263 times, it may look like Canadian Solar’s debt in unmanageable, but the company’s quarterly earnings growth of 126% shows that it can manage the debt in the long-term. The stock is currently undervalued, probably because of its debt concerns, as it is trading at a trailing P/E of just 5.7 times.

However, due to the strong revenue and earnings growth, I think Canadian Solar’s debt is manageable and the company is trading at a bargain.
Published on Oct 17, 2016
By Akshansh Gandhi

Copyrighted 2020. Content published with author's permission.

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