ReneSola Might Be a Bigger Bargain Than You Think

ReneSola (NYSE: SOL  ) may be cheaper than you think.

In the daily noise machine of CNBC, analyst estimates, and quarterly announcements, investors are inundated with talking heads obsessing over earnings-per-share figures.

Earnings, or net income, is an accounting construction that is the basis for the price-to-earnings ratio, the most popular way of measuring how cheap or expensive a stock is.

But free cash flow -- the amount of cash a company earns on its operations minus what it spends on them -- is another, oftentimes more accurate measure of earnings that can give you an advantage.

How ReneSola stacks up                                   
If ReneSola tends to generate more free cash flow than net income, there's a good chance earnings-per-share figures understate its profitability and overstate its price tag. Conversely, if ReneSola consistently generates less free cash flow than net income, it may be less profitable and more expensive than it appears.

This graph compares ReneSola's historical net income to free cash flow. (I omitted various gains and charges such as tax deferrals, restructurings, and benefits related to stock options.)

As you can see, ReneSola has a tendency to produce less free cash flow than net income. This means that the standard price-to-earnings multiple investors use to judge companies may understate its price tag.

There can be a variety of reasons to disregard such a discrepancy; for example, free cash flow can overstate earnings in businesses with volatile working capital needs, or understate earnings in high growth companies that are reinvesting capital in the business.

Alternatively, in cases where free cash flow more accurately measures earnings, such a discrepancy can indicate a company that is more -- or less -- expensive than investors realize.

Let's examine ReneSola alongside some of its peers for additional context:

Company	Price-to-Earnings Ratio	Adjusted Price-to-Free-Cash-Flow Ratio
ReneSola	1.6	3.2
Hanwha SolarOne (Nasdaq: HSOL  )	2.8	N/A*
Yingli Green Energy (NYSE: YGE  )	3.7	N/A**
JA Solar (Nasdaq: JASO  )	2.6	N/A**

* Negative free cash flow. ** As of latest fiscal year.

Like many of its solar peers, ReneSola trades at a dirt-cheap price-to-earnings multiple.

However, unlike these other companies, ReneSola is finally free-cash-flow positive. While its high capital expenditure needs mean that the company generates less free cash flow than net income -- and is therefore more expensive than many investors realize -- its price-to-free-cash-flow multiple also sits in distressed territory.

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