First Solar, Inc. was established in 1999 by the First Solar Company. First Solar Inc. manufactures solar equipment and supplies solar energy. The company makes its solar modules using a thin-film semiconductor in a new CdTe technology. First Solar Inc. has its headquarters in Arizona Unite states; operates in North America, Asia, and Europe. It started the production of commercial products in 2000. Since Its establishment; First Solar Inc. has expanded its annual manufacturing capacity rate at 59.6 MW in each of its lines by the third quarter of the financial period in 2010. Solar is one of the traded energy companies in the US. It launched its first IPO in 2006 and traded it’s under FSLR in NASDAQ.
The 12 Principles of finance and their application in First Solar Inc., Inc
Risk-return trade-off; First Solar Inc. made expansion into the production of more megawatts of solar energy and manufacturing of solar equipment in 2010. The company, after critical analysis, made a projection that the returns from these new investments were higher than the risk involved. For instance, when they expanded to manufacturing of solar equipment in 2008 their sales increased from $ 348,694 to $ 1,424,935 in one financial year. This is an indication of a risk-return trade-off.
Brealey and Allen (2006) state that “The time value of money; the value of any dollar received at the present time is worth more than the same amount of dollar received in the latter days”. The company takes the opportunity to invest its cash inflows to cater for the future changes interest rats in the future. The dollar that First Solar Inc. invests today in their acquired assets will not reduce in value since there will be cash inflows generated from that investment. In 2008 and 2009, they purchased fixed assets at $119853 with the available cash. This investment later generated a cash inflow of 062364 when sold in the third quarter of 2010. There is also short-term investment they undertake like the buying of securities, these securities increase in value and maintain the current value of the dollar invested (Brealey and Allen 2006).
The value of a business is the cash inflows and not the profit; this principle postulates that even if the profits are higher and the relevant cash from those profits is not received then, the value of the business is still at stake. The manager in their 2010 quarter financial release commented that:-
First Solar, Inc makes an inclusive financial analysis by providing both the profit and loss accounts for every financial period as well as cash flow statements.
Belbin (2004) explains that; for the company to invest they reinvest the extra funds from the cash flow statement and not what the profit has shown. For instance, in 2009 the net cash inflow was $ 364,814 while the profits for the same period were 215,559. This indicates that the profits in most cases may be exaggerated because other factors like depreciation are factored in which has got no financial effect.
The incremental Cash flows change the account’s value; these cash flows that accrue when the project is undertaken represent the value of the project. Bazerman (2002) indicates that; if the project is not taken and the cash flows are higher than when the project is taken, the value of such projects does not improve the financial position of the company. First Solar Inc. investments in other projects like the acquisition of OptiSolar Inc and merging with it in 2009. This acquisition increased the cash inflow; this was more than if the project was not taken. This incremental cash flow is again to the company since the initiated project brings has more cash inflow that is higher than if the same project is not taken.
In the energy company, stiff competition by the companies is witnessed. The companies that provide different types of power to consumers outwit each other on the basis of reliability, price, and coverage. First Solar Inc. operates in markets that include; Asia, Europe, and North America giving it a larger market base. This market base helps in higher returns on sales which is a direct inducer to income. The company has innovated much by the provision of solar equipment to keep up with the stiff competition; this innovation has helped the company to diversify. Diversification helps to reduce the risk of losses emerging from one line business.
There is an efficient market in NASCAR where the shares of First Solar Inc. sell at a fair price. When it first hit the market, the share values were lower but as the trading continues their prices have increased due to the performance of the company outside the financial market.
The agency principle has affected First Solar Inc., Inc in many ways. The management has been trying to expand further; the shareholders want to maximize the value of their investments. The value of net income per share reduce from 5.99 to $ 2.70 in 2009 nine monthly tradings while the investments increased by 14%. The management and the shareholders have a challenge of ascertaining which point to balance the needs of management and the interest of the shareholders of First Solar Inc.
Taxes that are paid affect the decision made on the business by the management. The taxes increase as the income of the business goes up. In 2008, the business paid taxes amounting to 17,555, in 2009 the taxes on income increased to 99,938 this affects the investment decision since more funds are paid as tax. These taxes would have been better reinvested into the business.
The management has tried to diversify some risks. Risks that can be controlled in the business like exchange rate fluctuations. They use different currencies in different countries. For example; in the US, they use the dollar while in Europe they use the Euro. Some risks that cannot be controlled are minimized by diversification. First Solar acquires more business to help in diversification and reduce risks.
Fist Solar gives the best ethical behavior to its clients. They produce energy that is environmentally friendly: solar energy. They also participate in societal activities like environmental conservation in North America. They also employ many people in their company. These ethical behaviors of providing employment opportunities to society help the business to have goodwill from its clients.
The market price of First Solar Inc. stocks indicates that the performance of the company is promising. When it was first traded in the stock market in 2006, the stocks were trading at $0.001 while in 20009, it was trading at 0.0015. This increment indicates that the company’s performance is on an upward trend.
A principle that explains the book value of assets and an example from the industry
The time value of money principle explains the book value of assets. When assets are bought, their prices are entered at that particular value: the book value. As time passes by, the prices of these assets changes with the time value of money and are covered with depreciation. This principle also explains the market value of assets. When the IPO of First Solar Inc. is offered today at a price and then taken to market, their trading value in the market will change giving a different market price.
First Solar Inc., Inc. provides environmentally friendly energy. The company’s solar Equipment is also cheap; this makes it have a wider market that translates to higher financial income. The industry also operates in different locations making it have a bigger market share of which many industries lack in the energy industry. The company also acquires other investments that expand its capital base. These are extremely distinctive financial characteristics that First Solar Inc. Inc. undertakes to outdo others in the industry.
The other companies are, therefore, challenged to lay strategies on how to capture the market that is going towards environmentally friendly energy. The company also has a very big capital base and expands easily. The other players are to acquire more funds in order to compete with it effectively in financial position.
Bazerman, M. (2002). Judgment in Managerial Decision Making. New York: John.
Belbin, M. (2004). Management Teams – Why They Succeed or Fail? 2nd Edition. Oxford: Elsevier Butterworth-Heinemann. ISBN 0 7506 910 6.
Brealey, R., and Allen, F. (2006) Corporate Finance. New York: McGraw-Hill. (ISBN 0-07-111551-X).