Bucher Industries (VTX:BUCN) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Bucher Industries AG (VTX:BUCN) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Our analysis indicates that BUCN is potentially undervalued!

What Is Bucher Industries's Net Debt?

As you can see below, Bucher Industries had CHF168.5m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have CHF449.8m in cash offsetting this, leading to net cash of CHF281.3m.

How Strong Is Bucher Industries' Balance Sheet?

According to the last reported balance sheet, Bucher Industries had liabilities of CHF1.02b due within 12 months, and liabilities of CHF197.5m due beyond 12 months. On the other hand, it had cash of CHF449.8m and CHF672.5m worth of receivables due within a year. So its liabilities total CHF99.7m more than the combination of its cash and short-term receivables.

Of course, Bucher Industries has a market capitalization of CHF3.52b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Bucher Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Bucher Industries has boosted its EBIT by 30%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Bucher Industries 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 company can only pay off debt with cold hard cash, not accounting profits. Bucher Industries 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, Bucher Industries recorded free cash flow worth 73% 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 look at a company's total liabilities, it is very reassuring that Bucher Industries has CHF281.3m in net cash. And we liked the look of last year's 30% year-on-year EBIT growth. So we don't think Bucher Industries's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Bucher Industries, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.