JA Solar Shows Us the Other Hand

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Did JA Solar (Nasdaq: JASO) turn a profit in its most recent quarter? It all depends on your point of view.

According to GAAP accounting standards, which by definition are generally acceptable, JA reported a per-share loss of one penny on a fully diluted basis. But another thing about GAAP numbers is that they often don't present the full picture.

As with LDK Solar (NYSE: LDK), JA engaged in some creative financing a few months ago. The intent was to minimize share dilution stemming from a convertible bond offering. One consequence is that the company now has some funky mark-to-market accounting distorting its income statement.

Oil and gas companies like Devon Energy (NYSE: DVN) have to deal with this sort of issue all the time. They routinely report alternate income measures that exclude the impact of unrealized hedging gains and losses. JA Solar has fashioned a non-GAAP figure of its own, and backed out stock compensation expenses for good measure. I'm no fan of waving away the very real impact of stock options, but I'm just curmudgeonly like that. The non-GAAP earnings per share figure of $0.14 is still a useful counterpoint to official EPS.

I'm also curmudgeonly when it comes to cash flows, and this brings me to yet another way of judging profitability. Note that cash on hand increased by around $300 million from the first quarter. That would be impressive, had there not been a $400 million debt raise during the period.

Back out that financing, and JA Solar consumed cash in the quarter. The usual suspects were to blame: prepayments to silicon suppliers and capital expenditures. Prepayments now amount to nearly a third of total assets. The company's CFO noted that without these outlays the company would have positive operating cash flow. That's about as exculpatory as telling a highway patrolman you'd be sober if it weren't for that last brew you chugged.

The simple fact is that JA has to keep burning cash to stay relevant in this highly dynamic market. If the demand for solar cells produced by the likes of JA, Suntech Power (NYSE: STP), and Solarfun Power (Nasdaq: SOLF) weren't so feverish, I would be downright fearful. For now, I'm merely cautious.

Related Foolishness:

• I was certainly more cheery last quarter.
• That was before I started counting the cash.
• JA's not the only one feeling a prepayment pinch.