Is Vestas Wind Systems (CPH:VWS) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Vestas Wind Systems A/S (CPH:VWS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Vestas Wind Systems

What Is Vestas Wind Systems's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Vestas Wind Systems had debt of €2.88b, up from €1.98b in one year. However, it also had €1.50b in cash, and so its net debt is €1.38b.

How Healthy Is Vestas Wind Systems' Balance Sheet?

The latest balance sheet data shows that Vestas Wind Systems had liabilities of €13.3b due within a year, and liabilities of €4.22b falling due after that. Offsetting this, it had €1.50b in cash and €4.14b in receivables that were due within 12 months. So it has liabilities totalling €11.8b more than its cash and near-term receivables, combined.

Vestas Wind Systems has a very large market capitalization of €20.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Vestas Wind Systems can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Vestas Wind Systems made a loss at the EBIT level, and saw its revenue drop to €15b, which is a fall of 5.8%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Vestas Wind Systems produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €653m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €807m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Case in point: We've spotted 1 warning sign for Vestas Wind Systems you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.