Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Siemens Limited (NSE:SIEMENS) makes use of 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Siemens
What Is Siemens's Debt?
You can click the graphic below for the historical numbers, but it shows that Siemens had ₹1.82b of debt in September 2022, down from ₹2.22b, one year before. But on the other hand it also has ₹66.4b in cash, leading to a ₹64.6b net cash position.
A Look At Siemens' Liabilities
According to the last reported balance sheet, Siemens had liabilities of ₹79.9b due within 12 months, and liabilities of ₹5.01b due beyond 12 months. Offsetting these obligations, it had cash of ₹66.4b as well as receivables valued at ₹59.3b due within 12 months. So it can boast ₹40.8b 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.
In addition to that, we're happy to report that Siemens has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. 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 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. 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. Over the most recent three years, Siemens recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While it is always sensible to investigate a company's debt, in this case Siemens has ₹64.6b in net cash and a decent-looking balance sheet. And we liked the look of last year's 48% year-on-year EBIT growth. 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.
About NSEI:SIEMENS
Siemens
Manufactures and sells electric motors, generators, transformers, electricity distribution and control apparatus, general purpose machinery, other electrical equipment, electronic components, and optical products in India and internationally.
Solid track record with excellent balance sheet and pays a dividend.