David Iben put it well when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Vestas Wind Systems A / S (CPH: VWS) uses debt. But should shareholders be concerned about its use of debt?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first look at cash and debt levels, together.
See our latest review for Vestas Wind Systems
What is the debt of Vestas Wind Systems?
The image below, which you can click for more details, shows that in June 2021, Vestas Wind Systems had a debt of 1.48 billion euros, compared to 933.0 million euros in one year. . However, his balance sheet shows that he has € 1.60 billion in cash, so he actually has € 117.0 million in net cash.
How strong is Vestas Wind Systems’ balance sheet?
The most recent balance sheet shows that Vestas Wind Systems had liabilities of € 13.0 billion due within one year and liabilities of € 2.03 billion due beyond. In compensation for these obligations, he had cash of € 1.60 billion as well as receivables valued at € 3.56 billion within 12 months. Its liabilities therefore amount to € 9.88 billion more than the combination of its cash and short-term receivables.
Vestas Wind Systems has a very large market capitalization of 34.4 billion euros, so it could very likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debts. Despite its notable liabilities, Vestas Wind Systems has a net cash flow, so it is fair to say that it does not have a heavy debt load!
It is also good that Vestas Wind Systems’ load is not too heavy, as its EBIT is down 36% compared to last year. When a business sees its profits accumulate, it can sometimes see its relationship with its lenders deteriorate. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Vestas Wind Systems can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. While Vestas Wind Systems has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building. (or erode) that cash balance. Over the past three years, Vestas Wind Systems has recorded free cash flow of 22% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.
Although Vestas Wind Systems has more liabilities than liquid assets, it also has net cash of € 117.0 million. So while we see areas for improvement, we are not overly concerned about Vestas Wind Systems’ bottom line. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Note that Vestas Wind Systems shows 1 warning sign in our investment analysis , you must know…
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.
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