Canadian Solar (NASDAQ:CSIQ) is one of the biggest solar manufacturers in the world, which you would think would be a great market to be in considering the growth solar has seen over the last decade. But it's been very difficult to make a profit in solar long-term, and despite being one of the biggest solar manufacturers in the world, Canadian Solar's profitability has been very low.

Looking into the rest of 2017 and 2018, it doesn't look like conditions will get much better. Here's why Canadian Solar's worst days may still be ahead.

Commodity solar panels aren't a great business

One of the biggest drivers of growing solar adoption globally is the decline in solar panel prices. A decade ago, crossing the $1 per watt barrier was still a long way off, but today a commodity solar panel can be purchased for $0.35 to $0.40 per watt. That's great for project developers, but it makes for tough economics for solar manufacturers.

Not only are declining prices a challenge, equipment must constantly be upgraded. So the return on equipment falls rapidly after a manufacturing plant is built, and within a decade the plant is usually obsolete.

In Canadian Solar's case, building out commodity cells and module manufacturing make for a really tough business long-term. If margins are high, it's easy for competitors to expand and oversupply the market, leading to unattractive economics long-term. And, as I mentioned, even the best case scenario is that equipment will last a decade and generate declining returns over that time. The financial history of large, Chinese solar manufacturers is terrible (see Suntech Power, Yingli Green Energy, Renesola, etc.), and that's not a good sign for Canadian Solar.

Buying into project development at the wrong time

One of the biggest moves Canadian Solar has made in the last few years was buying solar project developer Recurrent Energy from Sharp for $265 million. The problem is, it bought the company at exactly the wrong time.

Before the deal was closed in 2015, solar companies were trying to move into project development because they saw developers making money building power plants while they lost money selling solar panels to them. On the surface, it made sense. Solar companies could sign a project and develop it, and sell it for a large profit when it was complete, leveraging each MW of panel production into higher sales and margins overall.

But the development business has become hyper-competitive, and there's little money to be made today. Competitors like First Solar and SunPower, which were early to the development business, began making the transition away from development to more component sales shortly after Canadian Solar acquired Recurrent. With component sales they can build fully engineered solutions without taking on the same financial risk that comes with development.

Canadian Solar may have bought Recurrent at precisely the wrong time, and if that leads to losses on project sales or the write down of some of the purchase price it'll be bad for the company's already weakened financial state.

What about all that debt?

If there's one big reason to be down on Canadian Solar it's debt. The company spent billions building manufacturing plants that are generating very little margin, and now has hundreds of millions of solar projects on the balance sheet that may have to be sold at a loss. You can see below that as debt has risen it hasn't been accompanied by an increase in operating profit.

Eventually that debt has to be paid back, and right now it's hard to see how it all can be. Leverage is what kills in the solar industry, and Canadian Solar may have taken out more than it can ever pay back.

What's next for Canadian Solar?

I don't know if Canadian Solar will be the next huge bankruptcy in solar, but the company's strategic position isn't very good right now. Commodity solar panels don't sell for a premium, and as more efficient options spread in the market we'll see its older capacity become obsolete. The move into project development may come back to bite it eventually, and I think eventually that debt load will become a big burden.

As big competitors like SunPower and First Solar adjust their businesses to leverage lower costs and higher efficiency in fully engineered component sales, Canadian Solar seems content to compete in the commodity solar market. I don't think that's a place investors want to be, and that's why the worst may be yet to come for Canadian Solar.