Is Wärtsilä Oyj Abp (HEL:WRT1V) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Wärtsilä Oyj Abp (HEL:WRT1V) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Wärtsilä Oyj Abp

How Much Debt Does Wärtsilä Oyj Abp Carry?

As you can see below, Wärtsilä Oyj Abp had €522.0m of debt at March 2024, down from €646.0m a year prior. However, it does have €872.0m in cash offsetting this, leading to net cash of €350.0m.

A Look At Wärtsilä Oyj Abp's Liabilities

According to the last reported balance sheet, Wärtsilä Oyj Abp had liabilities of €3.72b due within 12 months, and liabilities of €1.09b due beyond 12 months. Offsetting these obligations, it had cash of €872.0m as well as receivables valued at €1.93b due within 12 months. So its liabilities total €2.01b more than the combination of its cash and short-term receivables.

Given Wärtsilä Oyj Abp has a humongous market capitalization of €10.8b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Wärtsilä Oyj Abp boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Wärtsilä Oyj Abp grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. 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 Wärtsilä Oyj Abp 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Wärtsilä Oyj Abp may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Wärtsilä Oyj Abp actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Wärtsilä Oyj Abp's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €350.0m. And it impressed us with free cash flow of €784m, being 142% of its EBIT. So is Wärtsilä Oyj Abp's debt a risk? It doesn't seem so to us. We'd be very excited to see if Wärtsilä Oyj Abp insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com