Is Vestas Wind Systems (CPH:VWS) A Risky Investment?

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.' 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. As with many other companies Vestas Wind Systems A/S (CPH:VWS) makes use of debt. But the more important question is: how much risk is that debt creating?

We check all companies for important risks. See what we found for Vestas Wind Systems in our free report.

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Vestas Wind Systems's Debt?

As you can see below, Vestas Wind Systems had €2.21b of debt at December 2024, down from €2.66b a year prior. However, it does have €3.98b in cash offsetting this, leading to net cash of €1.77b.

How Healthy Is Vestas Wind Systems' Balance Sheet?

According to the last reported balance sheet, Vestas Wind Systems had liabilities of €15.5b due within 12 months, and liabilities of €5.62b due beyond 12 months. On the other hand, it had cash of €3.98b and €5.58b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €11.5b.

This deficit is considerable relative to its very significant market capitalization of €11.8b, so it does suggest shareholders should keep an eye on Vestas Wind Systems' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Vestas Wind Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Vestas Wind Systems

Even more impressive was the fact that Vestas Wind Systems grew its EBIT by 1,953% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Vestas Wind Systems can strengthen its balance sheet over time. 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. While Vestas Wind Systems has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Vestas Wind Systems actually produced more free cash flow than EBIT over the last two years. 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 €1.77b. And it impressed us with free cash flow of €1.2b, being 170% of its EBIT. So we are not troubled with Vestas Wind Systems's debt use. We'd be motivated to research the stock further if we found out that Vestas Wind Systems insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.