Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Siemens Gamesa Renewable Energy, S.A. (BME:SGRE) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Siemens Gamesa Renewable Energy Carry?
As you can see below, Siemens Gamesa Renewable Energy had €1.18b of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds €1.80b in cash, so it actually has €619.8m net cash.
A Look At Siemens Gamesa Renewable Energy’s Liabilities
Zooming in on the latest balance sheet data, we can see that Siemens Gamesa Renewable Energy had liabilities of €8.52b due within 12 months and liabilities of €3.35b due beyond that. Offsetting these obligations, it had cash of €1.80b as well as receivables valued at €3.13b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €6.9b.
Siemens Gamesa Renewable Energy has a very large market capitalization of €13.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Siemens Gamesa Renewable Energy also has more cash than debt, so we’re pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Siemens Gamesa Renewable Energy’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Siemens Gamesa Renewable Energy had a loss before interest and tax, and actually shrunk its revenue by 3.5%, to €9.6b. We would much prefer see growth.
So How Risky Is Siemens Gamesa Renewable Energy?
Although Siemens Gamesa Renewable Energy had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €900m. So although it is loss-making, it doesn’t seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we’d really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. Take risks, for example – Siemens Gamesa Renewable Energy has 1 warning sign we think you should be aware of.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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