First Solar stock has declined more than 35% in the last three months. It serves as an opportunity for investors looking to enter the stock. Its current valuation suggests relatively lower amount of risk. However, Jefferson Research has assigned First Solar a Sell rating, largely due to its weak balance sheet quality, poor operating efficiency and pathetic earnings quality.

First Solar, Inc. Earnings Quality Gets 'Weakest' Rating

A look at First Solar’s operating efficiency

Investors have long analyzed earnings quality and used it as a measure of the fundamental quality of a business. Companies sometimes include certain items to make their reported earnings look bigger, even if the amount of cash flow supporting the earnings is weak. Jefferson adjusts for these items to come up with an adjusted earnings figure that more accurately reflects the business fundamentals.

The research firm says that First Solar’s earnings quality is “weakest.” The Tempe, Arizona-based company reported net income of $88 million in the last quarter. But operating cash flow plunged from $118 million last year to negative $47 million in the last quarter.

Jefferson says the cash flow quality of First Solar remains strong. The company’s operating cash flow quality improved in the current fiscal year with a reported figure of $856 million. The adjusted number from Jefferson was 88% of the reported figure.

Moreover, First Solar’s operating efficiency was rated “weakest’ by Jefferson Research. Though the company’s net margin, EBIT margin and SGA costs improved over the last quarter, the equity turnover, gross margin and ROIC deteriorated. The EBIT margin rose from 0.4% to 9.4%. But it was offset by a decline in ROIC, which fell from 8.1% to 5.7% in the same period.

First Solar’s balance sheet rating deteriorated

The company’s balance sheet rating deteriorated from ‘strong’ to ‘weak.’ That’s due to the poor performance of all five measures in the last quarter: current ratio, quick ratio, cash position, account receivable days outstanding, and inventory days. The number of days inventory is held increased from 66 to 89. The higher inventory days indicate that the company will require more working capital.

First Solar shares gained 0.66% to $44.13 at 10:33 AM EST on Tuesday.