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 can see that Siemens Gamesa Renewable Energy, S.A. (BME:SGRE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Gamesa Renewable Energy

What Is Siemens Gamesa Renewable Energy's Net Debt?

As you can see below, Siemens Gamesa Renewable Energy had €1.14b of debt at June 2019, down from €1.81b a year prior. However, its balance sheet shows it holds €1.16b in cash, so it actually has €20.6m net cash.

How Strong Is Siemens Gamesa Renewable Energy's Balance Sheet?

The latest balance sheet data shows that Siemens Gamesa Renewable Energy had liabilities of €7.35b due within a year, and liabilities of €2.72b falling due after that. Offsetting this, it had €1.16b in cash and €3.61b in receivables that were due within 12 months. So it has liabilities totalling €5.30b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €8.13b, so it does suggest shareholders should keep an eye on Siemens Gamesa Renewable Energy's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Siemens Gamesa Renewable Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Siemens Gamesa Renewable Energy grew its EBIT by 47% 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 ultimately the future profitability of the business will decide if Siemens Gamesa Renewable Energy 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 Gamesa Renewable Energy 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 last three years, Siemens Gamesa Renewable Energy recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for and improvement.

Summing up

Although Siemens Gamesa Renewable Energy's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €21m. And it impressed us with its EBIT growth of 47% over the last year. So we don't have any problem with Siemens Gamesa Renewable Energy's use of debt. 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 Gamesa Renewable Energy's earnings per share history for free.

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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.