Does Siemens (NSE:SIEMENS) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 Siemens Limited (NSE:SIEMENS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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.

See our latest analysis for Siemens

What Is Siemens's Debt?

As you can see below, Siemens had ₹2.04b of debt at March 2022, down from ₹2.46b a year prior. However, its balance sheet shows it holds ₹50.9b in cash, so it actually has ₹48.9b net cash.

How Healthy Is Siemens' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Siemens had liabilities of ₹74.7b due within 12 months and liabilities of ₹5.45b due beyond that. Offsetting this, it had ₹50.9b in cash and ₹60.0b in receivables that were due within 12 months. So it actually has ₹30.7b more liquid assets than total liabilities.

This short term liquidity is a sign that Siemens could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Siemens has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Siemens grew its EBIT by 5.1% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Siemens's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Siemens 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. During the last three years, Siemens produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Siemens has net cash of ₹48.9b, as well as more liquid assets than liabilities. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in ₹5.0b. So we don't think Siemens's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Siemens, you may well want to click here to check an interactive graph of its earnings per share history.

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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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.