Here's Why Vestas Wind Systems (CPH:VWS) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Vestas Wind Systems A/S (CPH:VWS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Vestas Wind Systems

What Is Vestas Wind Systems's Net Debt?

As you can see below, at the end of December 2023, Vestas Wind Systems had €2.83b of debt, up from €1.93b a year ago. Click the image for more detail. However, its balance sheet shows it holds €3.32b in cash, so it actually has €490.0m net cash.

A Look At Vestas Wind Systems' Liabilities

We can see from the most recent balance sheet that Vestas Wind Systems had liabilities of €14.0b falling due within a year, and liabilities of €5.45b due beyond that. On the other hand, it had cash of €3.32b and €4.57b worth of receivables due within a year. So its liabilities total €11.6b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Vestas Wind Systems is worth a massive €25.1b, 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, Vestas Wind Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Vestas Wind Systems made a loss at the EBIT level, last year, but improved that to positive EBIT of €36m 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 Vestas Wind Systems'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Vestas Wind Systems 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. Happily for any shareholders, Vestas Wind Systems actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Vestas Wind Systems does have more liabilities than liquid assets, it also has net cash of €490.0m. The cherry on top was that in converted 381% of that EBIT to free cash flow, bringing in €137m. So we are not troubled with Vestas Wind Systems's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Vestas Wind Systems has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.