Is Siemens (NSE:SIEMENS) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Siemens Limited (NSE:SIEMENS) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Siemens

What Is Siemens's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Siemens had debt of ₹2.79b, up from ₹1.75b in one year. But on the other hand it also has ₹95.3b in cash, leading to a ₹92.5b net cash position.

How Strong Is Siemens' Balance Sheet?

According to the last reported balance sheet, Siemens had liabilities of ₹89.1b due within 12 months, and liabilities of ₹11.3b due beyond 12 months. On the other hand, it had cash of ₹95.3b and ₹75.6b worth of receivables due within a year. So it can boast ₹70.5b 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.

Another good sign is that Siemens has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. 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 Siemens 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Siemens 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. Over the most recent three years, Siemens recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Siemens has ₹92.5b in net cash and a decent-looking balance sheet. And we liked the look of last year's 27% year-on-year EBIT growth. So we don't think Siemens's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Siemens's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.