First Solar: CFRA’s accounting Quality Concerns Harvard Case Solution & Analysis

Industry Analysis

Solar is the most abundant form of energy. In order to take the advantage of this energy, scientists develop solar panels. The industry of solar panels is growing continuously and the price per watt of energy produced through solar panel has decreased from $10.5 per watt to $7.6 per watt.

Despite the reduction in per watt prices, solar energy is considered as a most expensive source of energy among others. Therefore, the government of many countries is providing subsidies and trade in tariffs in order to promote the solar industry.
In addition to this, economic downturn also affects the industry adversely, which results in loss of interest from potential investors.

An Assessment of the Current Market Multiple for First Solar

The price to earnings and price to book ratio is given for last three years of First solar company and for its competitors. It is expected that the price to earnings ratio of each company is decreasing as compared to last years. Similarly, the price to earnings ratio of First Solar Company is also decreasing continuously and by the year end of 2008 the price to earnings ratio of solar company has decreased from 241.61 to 40.51.

It is expected that investors have lost their interest with respect to the solar industry due to the decrease in oil prices which resulted in global financial crisis. Due to the decrease in investors’ confidence, the P/E ratio of almost each solar company is reducing continuously.

In addition to this, the price to book ratio of the overall industry is also reducing due to decrease in share prices. It is expected that the most credit rating agencies make foolish assumptions about the First Solar,which creates a bubble around the share price of the company as this bubble bursts due to financial crisis then it affects the share price of the company adversely.

Analysis of the Key Risks Facing First Solar and How They Could Be Managed

First Solar Company is operating in a more competitive environment where there are many large solar companies are present. Although the solar industry is tax efficient however, there are many associated risks with the industry. Therefore, First Solar is facing both industry risks and operational risks. It is expected that the industry risks are due to the financial crisis which are uncontrollable however, operational risks of the company could be controlled through better management.

First of all, the company is facing low conversion efficiency rate, which is just 9.5%whereas, the conversion efficiency rate of solar power is 23% which is considered a closest competitor. Therefore, it is expected that First Solar requires spice twice as compared to Sun power to access same amount of energy. The reasons of low conversion rate could be many however the main reason of low conversion rate is focusing only on cadmium telluride.

It is expected that cadmium telluride is comparatively a new material and only First Solar is practicing through this material, therefore conversion rate could be maximized by adopting industry’s norms. Using new material also creates different safety issues for the company, which could create significant reputational risk for the company.

In addition to this,almost each company is providing greater warranty liabilities in order to attract greater number of customers and in order to attain greater market share. Similarly, Solar Company has also increased its warranty liabilities to 64%,which shows that the company is following the aggressive strategy in order to attain greater market share. Providing greater warranty liabilities have increased the risk of decrease in profit margin in future............................

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