Solar energy stocks are promising, but still quite risky

— -- A: Solar power seems like one of those things that should be a natural winner for both consumers and investors.

Thanks to falling prices for solar panels, it's increasingly cost effective for homeowners, especially in the sunbelt to put solar panels on their roofs. And thanks to a variety of subsidies, governments are helping pay for alternative energy.

While falling product prices might be a problem in other industries, it's actually a benefit to solar companies. When the prices on solar gear falls, that makes the technology more competitive with fossil fuels.

Given the economics, solar power will likely play a part in how households generate their power. But here's the problem: Making money on seemingly obvious trends is difficult. In the short term, the solar stocks can be extremely volatile as they tend to move with the price of oil. If the price of oil falls, solar stocks tend to fall as well.

Longer term, the trouble is trying to pick companies that will win from those that will lose. There are a number of solar companies vying for the business and clearly many won't make it. So if you invest in the wrong player, you could suffer a large loss, even if the industry does well.

The importance of picking the right solar stock is what you're getting at with your question about the financial strength of Evergreen Solar and Canadian Solar.

There are many ways to determine how financially strong companies are. One popular way is to examine free cash flow, or the amount of cash a company uses or generates from operations after paying for the overhead they need to keep going.