Financial Distress Caused By Overusing Financial Leverage

In the past decades, the Photovoltaic(PV) industry has been developed rapidly. From2006to2010, the domestic annual output of PV cells was increasing at100%or more than100%rate. In2011due to European sovereign debt expanded and aggravated, trade protection revived, the level of profit fallen sharply. Within a few month, more than50PV companies collapsed, one third of companies in a semi-cut-off state of capacity,9out of11publicly listed companies in the USA were in a loss of status, and Suntech and LDK dominated top two of loss-ranking-list. In2012influenced by antidumping and countervailing, publicly listed companies in the USA were in a loss of status.According to LDK annual report of2012, total assets is5024Million dollars, total liabilities is more than total assets up to5204Million dollars, total assets liabilities ratio is94.4%.The final owner’s equity is negative, now LDK is in the state of insolvency. Once LDK was renowned for "beyond the speed of light" in PV industry. Why LDK fallen sharply, and what cause LDK be in the state of financial distress?Based on the SWOT analysis for industry, introduction of LDK development history and analysis of capacity expansion based on credit, this paper will evaluate LDK financial performance, analyze profit model and risk factors. On the basis of the above analysis, this paper will apply several observational index of predictability to track the development of financial distress, attempt to find out causes of financial distress in LDK, and make some suggestions.PV industry is a strategic new material and new energy industry, and the development of PV industry concerns the future of energy security in China. Local governments once supported domestic PV industry in succession. These days the depression of PV industry seems to tell us that receiving the support from government is not enough. Enterprises and industry can not grow up only relying on "blood transfusion" from government. The new industry need government support, what is more important is well-managed by enterprise self.This paper is trying to use the knowledge of financial management, and associate with SWOT analysis of PV industry and introduction of LDK development, in order to find out the causes of financial distress. This paper will review the history of LDK, grown rapidly with the help of financial leverage, then dropped sharply. Attempt to offer enterprises in PV industry some lessons in financial management.