Vestas Wind Systems (CPH:VWS) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Vestas Wind Systems A/S (CPH:VWS) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Vestas Wind Systems

What Is Vestas Wind Systems's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Vestas Wind Systems had debt of €1.93b, up from €891.0m in one year. However, it does have €2.38b in cash offsetting this, leading to net cash of €444.0m.

A Look At Vestas Wind Systems' Liabilities

The latest balance sheet data shows that Vestas Wind Systems had liabilities of €13.5b due within a year, and liabilities of €3.52b falling due after that. Offsetting these obligations, it had cash of €2.38b as well as receivables valued at €3.95b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €10.7b.

This deficit isn't so bad because Vestas Wind Systems is worth a massive €26.5b, and thus could probably raise enough capital to shore up 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. While it does have liabilities worth noting, Vestas Wind Systems also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Vestas Wind Systems had a loss before interest and tax, and actually shrunk its revenue by 7.1%, to €14b. We would much prefer see growth.

So How Risky Is Vestas Wind Systems?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Vestas Wind Systems had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €1.0b and booked a €1.6b accounting loss. Given it only has net cash of €444.0m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Vestas Wind Systems's profit, revenue, and operating cashflow have changed over the last few years.

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.