We Think Siemens (NSE:SIEMENS) Can Stay On Top Of Its 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 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. We note that Siemens Limited (NSE:SIEMENS) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, 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 Siemens

How Much Debt Does Siemens Carry?

As you can see below, Siemens had ₹1.83b of debt at March 2024, down from ₹2.04b a year prior. However, its balance sheet shows it holds ₹76.5b in cash, so it actually has ₹74.7b net cash.

How Strong Is Siemens' Balance Sheet?

We can see from the most recent balance sheet that Siemens had liabilities of ₹87.2b falling due within a year, and liabilities of ₹5.34b due beyond that. Offsetting this, it had ₹76.5b in cash and ₹73.6b in receivables that were due within 12 months. So it actually has ₹57.6b more liquid assets than total liabilities.

This surplus suggests that Siemens has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Siemens has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Siemens grew its EBIT by 20% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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. 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. Looking at the most recent three years, Siemens recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Siemens has net cash of ₹74.7b, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. So is Siemens's debt a risk? It doesn't seem so to us. 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.