Wärtsilä Oyj Abp (HEL:WRT1V) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. 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?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Wärtsilä Oyj Abp

What Is Wärtsilä Oyj Abp's Net Debt?

As you can see below, Wärtsilä Oyj Abp had €511.0m of debt at September 2024, down from €686.0m a year prior. But on the other hand it also has €1.19b in cash, leading to a €677.0m net cash position.

How Healthy Is Wärtsilä Oyj Abp's Balance Sheet?

We can see from the most recent balance sheet that Wärtsilä Oyj Abp had liabilities of €3.92b falling due within a year, and liabilities of €980.0m due beyond that. Offsetting these obligations, it had cash of €1.19b as well as receivables valued at €1.91b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.79b.

Since publicly traded Wärtsilä Oyj Abp shares are worth a very impressive total of €10.0b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

On top of that, Wärtsilä Oyj Abp grew its EBIT by 92% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wärtsilä Oyj Abp's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Wärtsilä Oyj Abp has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Wärtsilä Oyj Abp actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Wärtsilä Oyj Abp does have more liabilities than liquid assets, it also has net cash of €677.0m. The cherry on top was that in converted 133% of that EBIT to free cash flow, bringing in €1.0b. So we don't think Wärtsilä Oyj Abp's use of debt is risky. 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.

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.