Vestas Wind Systems (CPH:VWS) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Vestas Wind Systems A/S (CPH:VWS) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Vestas Wind Systems

How Much Debt Does Vestas Wind Systems Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Vestas Wind Systems had debt of €2.43b, up from €1.40b in one year. However, because it has a cash reserve of €1.14b, its net debt is less, at about €1.29b.

A Look At Vestas Wind Systems' Liabilities

According to the last reported balance sheet, Vestas Wind Systems had liabilities of €13.1b due within 12 months, and liabilities of €3.66b due beyond 12 months. On the other hand, it had cash of €1.14b and €4.13b worth of receivables due within a year. So its liabilities total €11.4b more than the combination of its cash and short-term receivables.

Vestas Wind Systems has a very large market capitalization of €26.9b, so it could very likely raise cash to ameliorate 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. 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 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 €14b, which is a fall of 6.9%. That's not what we would hope to see.

Caveat Emptor

Importantly, Vestas Wind Systems had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €428m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €1.7b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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.

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.