First solar case
Due to consideration of rising energy demand, global warming and nature of solar power, the solar industry has experienced a rapid development these years. First Solar, as one of the dominant companies in the industry, is suspected and scrutinized by CFRA for aggressive accounting practices. CFRA’s investigation aims at identifying potential risks in several areas, including revenue quality and recognition, inventory levels, customer and geographic diversification, warranty policies, production capacity growth, and supply chain. This case focuses on whether CFRA should flag First Solar and add it to the “biggest concern” list.
The stock of First Solar has always been popular among investors considering the …show more content…
New energy sources, such as wind and tide, are also as great as, or even better than solar energy considering the efficiency and cost. Thus the threat of substitution of is high, because the switch cost of energy is not that high.
Risks and Recommendations
Based on the business and industry analysis, there are several risks identified using CFRA’s accounting quality standard.
High concentration of customers and geographic locations may result in revenue risk. Just as in Graph 1, there were five customers of First Solar accounting for more than 10% of sales each in 2008, and these major customers combined to account for 64.1%. This was a very high percentage in the industry. Theoretically, too much concentration in a limited number of customers is risky because when one major customer chose to cease the business, the company will suffer huge revenue loss. Given the fierce competition in the solar industry, the risk of loss customers is increasing.
According to Graph 2, First Solar had an extremely high exposure to Germany and Spain. To be specific, 74% of the sales in 2008 were from Germany and 20% were from Spain and other European countries. Only 6% of the sales were created from the rest of the world. The driving factors of high concentration in geography are low tax and tariff, attractive subsidies or support programs. However, once the policy changes, the