These 4 Measures Indicate That Wärtsilä Oyj Abp (HEL:WRT1V) Is Using Debt Safely

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.' 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. We note that Wärtsilä Oyj Abp (HEL:WRT1V) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is Wärtsilä Oyj Abp's Debt?

As you can see below, Wärtsilä Oyj Abp had €591.0m of debt at December 2023, down from €683.0m a year prior. However, it does have €819.0m in cash offsetting this, leading to net cash of €228.0m.

How Strong Is Wärtsilä Oyj Abp's Balance Sheet?

According to the last reported balance sheet, Wärtsilä Oyj Abp had liabilities of €3.45b due within 12 months, and liabilities of €1.13b due beyond 12 months. Offsetting these obligations, it had cash of €819.0m as well as receivables valued at €1.94b due within 12 months. So its liabilities total €1.81b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Wärtsilä Oyj Abp has a market capitalization of €8.30b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Wärtsilä Oyj Abp also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Wärtsilä Oyj Abp grew its EBIT by 277% over twelve months. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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

While Wärtsilä Oyj Abp does have more liabilities than liquid assets, it also has net cash of €228.0m. The cherry on top was that in converted 134% of that EBIT to free cash flow, bringing in €674m. So is Wärtsilä Oyj Abp's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Wärtsilä Oyj Abp would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.