We Think Siemens Energy (ETR:ENR) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Siemens Energy AG (ETR:ENR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Energy Carry?

You can click the graphic below for the historical numbers, but it shows that Siemens Energy had €2.02b of debt in December 2024, down from €3.85b, one year before. But on the other hand it also has €8.03b in cash, leading to a €6.01b net cash position.

How Strong Is Siemens Energy's Balance Sheet?

According to the last reported balance sheet, Siemens Energy had liabilities of €36.8b due within 12 months, and liabilities of €7.98b due beyond 12 months. Offsetting these obligations, it had cash of €8.03b as well as receivables valued at €12.2b due within 12 months. So its liabilities total €24.5b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Siemens Energy is worth a massive €47.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Siemens Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Siemens Energy

Notably, Siemens Energy made a loss at the EBIT level, last year, but improved that to positive EBIT of €174m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Siemens 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Siemens Energy may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Siemens Energy actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Siemens Energy's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €6.01b. And it impressed us with free cash flow of €3.2b, being 1,826% of its EBIT. So we are not troubled with Siemens Energy's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Siemens Energy that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.