First Solar Corporate Model and Danger of High ROIC

I have made models of First Solar Corporation on a couple of occasions. In my opinion the history of this company is explained by false beliefs that a company in a competitive industry can continue to earn very high returns that were originally driven by government subsidies to the industry. Before 2008, when subsidies were high (as well as the price of poly silicon), first solar earned high returns on invested capital (more than 40%). After 2008, the stock price and the returns fell, but they were still very high. Then, in 2011 the Chinese entered the market. The industry cried that there was over-capacity and that the competition was unfair (maybe). But prices remained low and returns stabilized at somewhere around the cost of capital. You can see all of this by looking at the return on invested capital in the models below. The model demonstrates how high returns cannot be sustained if you do not have a real competitive advantage which is very difficult in the solar manufacturing business. The corporate models for first solar use financial data and make alternative computations of the ROIC to reflect distortions created by writing off goodwill and taking losses due to re-structuring. The first model includes a lot of detail on how much prices and margins in the industry have come crashing down.

The second model demonstrates how to build scenario analysis and convert a corporate model into an acquisition model.