Take Chinese Solar with a Grain of Salt: ReneSola Ltd. (NYSE:SOL), Trina Solar Limited (TSL)

Trina’s large network of foreign offices in Latin America, Australia, North America, and Europe show that the company is putting its best foot forward to find more sales. Some areas of Latin America like Chile and Brazil are promising. The firm’s quick ratio of 0.8 is better than their Chinese competitors, but these off-balance-sheet obligations are very large. It is unclear whether the government is willing to come in and prop up Trina. Without stronger prices, the company could blow through its cash reserves very quickly, and leave investors paying the price.

Yingli Green Energy Hold. Co. Ltd. (NYSE:YGE) looks very similar to its Chinese brothers. The company has a very high total debt-to-equity ratio of 4.39 and a low quick ratio of 0.3. From Q2 2012 to Q3 2012, China grew from 14% to 28% of revenues while Germany fell from 57% to 48%. These numbers show the impact of Germany’s lowered feed in tariffs.

Yingli’s efficiencies are slowly increasing, but when GT Advanced Technologies starts to sell its HiCz equipment, then Yingli’s debt load could hold them back and leave them competing with old technology. This could devastate overseas sales, where the Chinese government isn’t able to extend its protective arm. Yingli is trading at depressed levels, and the future is not looking exceptionally bright, given its high debt load and future need to purchase new capital equipment.

Conclusion

The slow removal of excess capacity and the next generation of more efficient manufacturing techniques are a plus for the solar industry as a whole. Chinese manufacturers have a large debt loads, and it is unclear whether increased government targets will be enough to ensure profits for them.

The geopolitical friction between the China and the U.S. and the EU are other negative factors. The changes in the German markets have only added to these companies’ problems. For now, these solar manufactures look risky and uncertain. It is best to hold off and wait to see whether the central government is able to push up prices and return these firms to profitability.

The article Take Chinese Solar with a Grain of Salt originally appeared on Fool.com and is written by Joshua Bondy.

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