What are we looking for?
Renewable energy companies with low leverage and high liquidity.
The screen
Last month, U.S. President Joe Biden’s administration proposed expanding its renewable energy tax credit to include alternative energy projects beyond wind and solar. This proposal works alongside efforts to accelerate the approval of clean-energy projects to encourage the growth of the renewables sector in the United States. If Mr. Biden is re-elected in November and continues his administration’s commitment to climate action, this poses a great opportunity for renewable-energy companies to grow.
Last week, the Bank of Canada announced an interest-rate cut of 25 basis points, possibly signalling a lower rate environment in the long term. If the U.S. Federal Reserve follows suit, renewable energy companies with low leverage and high liquidity will have the greatest capacity to take on more projects and increase market share as the cost of debt becomes cheaper.
We identified renewable energy companies well positioned to succeed in a low-interest environment using FactSet’s universal screening tool and by applying according to the following guidelines:
- Traded on a U.S. exchange
- Market capitalization greater than US$1-billion
- Classified as part of the industrial manufacturing or utilities sector, according to FactSet, with a specialization in renewable energy (i.e., mixed alternatives, solar, wind, biomass, geothermal and hydroelectric energy)
- Debt-to-asset ratio less than 0.5
- Net debt to EBITDA ratio less than five
- Positive interest coverage ratio, a measure of a firm’s capacity to pay interest on outstanding debt
- Positive quick ratio, which is a measure of liquidity
We ranked the seven remaining companies by a multifactor ranking of their net-debt-to-EBITDA ratio and liquidity metrics. Net debt is calculated as a company’s total debt minus cash and cash equivalents. Consequently, a lower net-debt-to-EBITDA ratio signals a better capacity to cover debt obligations in the short term. Moreover, companies with a high-interest coverage ratio and quick ratio are favourable as it indicates a greater ability to meet interest payments and maintain liquidity, reducing the risk of default.
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What we found
The U.S. Energy Information Administration predicts the renewable-energy sector will generate 25 per cent of the nation’s electricity by 2025, surpassing coal and nuclear power. Although our screen is open to different renewable-energy sources, six out of seven companies passing our criteria specialize in solar energy. Ormat Technologies Inc., ORA-N a geothermal energy producer, was the only non-solar company in our screen. This speaks to the dominance of solar energy in the U.S. renewable space, a presence anticipated to grow as the U.S. rushes to meet its net-zero goal by 2050.
First Solar Inc., FSLR-Q a solar-panel manufacturing company, ranked first in our screen. Among the companies passing our criteria, First Solar led with the lowest net-debt-to-EBITDA ratio at -1.2. (Net debt is calculated as a company’s total debt minus cash and cash equivalents, if a company has more cash available than debt, the ratio can be negative.) First Solar also had the highest-interest coverage ratio and quick ratio in our screen at 72.8 and 2.9, respectively. First Solar’s earnings release last month beat analysts’ expectations, reporting first-quarter revenue of US$794.1-million (not shown in table), a 45-per-cent increase from last year.
Nextracker Inc., NXT-Q a solar-hardware producer, ranked second in our list of companies. Compared with its peers in our screen, Nextracker had the second-lowest net-debt-to-EBITDA ratio at -0.5 and second-highest interest coverage ratio of 42.5. The company announced fourth-quarter results in May, reporting a profit of US$736.5-million – a value higher than analysts expected and a 42-per-cent increase from last year.
Disclaimer: The information in this article is not investment advice. FactSet assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.
Christine Elegado is a consultant at FactSet Canada.