Is Siemens Gamesa Renewable Energy (BME:SGRE) Weighed On By Its Debt Load?

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.' 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 can see that Siemens Gamesa Renewable Energy, S.A. (BME:SGRE) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Siemens Gamesa Renewable Energy

How Much Debt Does Siemens Gamesa Renewable Energy Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Siemens Gamesa Renewable Energy had debt of €1.44b, up from €1.11b in one year. However, its balance sheet shows it holds €1.64b in cash, so it actually has €198.4m net cash.

How Healthy Is Siemens Gamesa Renewable Energy's Balance Sheet?

We can see from the most recent balance sheet that Siemens Gamesa Renewable Energy had liabilities of €8.05b falling due within a year, and liabilities of €3.42b due beyond that. On the other hand, it had cash of €1.64b and €2.72b worth of receivables due within a year. So its liabilities total €7.11b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Siemens Gamesa Renewable Energy has a huge market capitalization of €17.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Siemens Gamesa Renewable Energy boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Siemens Gamesa Renewable Energy 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, Siemens Gamesa Renewable Energy saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Siemens Gamesa Renewable Energy?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Siemens Gamesa Renewable Energy lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €31m and booked a €633m accounting loss. With only €198.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Siemens Gamesa Renewable Energy that 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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