Does Wärtsilä Oyj Abp (HEL:WRT1V) Have A Healthy Balance Sheet?

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 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 Wärtsilä Oyj Abp (HEL:WRT1V) makes use of debt. But is this debt a concern to shareholders?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Wärtsilä Oyj Abp

How Much Debt Does Wärtsilä Oyj Abp Carry?

The chart below, which you can click on for greater detail, shows that Wärtsilä Oyj Abp had €698.0m in debt in June 2023; about the same as the year before. However, it does have €505.0m in cash offsetting this, leading to net debt of about €193.0m.

How Strong Is Wärtsilä Oyj Abp's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wärtsilä Oyj Abp had liabilities of €3.66b due within 12 months and liabilities of €1.04b due beyond that. Offsetting these obligations, it had cash of €505.0m as well as receivables valued at €2.21b due within 12 months. So it has liabilities totalling €2.00b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Wärtsilä Oyj Abp is worth €6.35b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Wärtsilä Oyj Abp's net debt is only 0.47 times its EBITDA. And its EBIT easily covers its interest expense, being 20.5 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Better yet, Wärtsilä Oyj Abp grew its EBIT by 168% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wärtsilä Oyj Abp 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 company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Wärtsilä Oyj Abp actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Happily, Wärtsilä Oyj Abp's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Overall, we don't think Wärtsilä Oyj Abp is taking any bad risks, as its debt load seems modest. So we're not worried about the use of a little leverage on the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Wärtsilä Oyj Abp you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.