Bucher Industries (VTX:BUCN) Has A Pretty Healthy Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Bucher Industries AG (VTX:BUCN) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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

View our latest analysis for Bucher Industries

How Much Debt Does Bucher Industries Carry?

The image below, which you can click on for greater detail, shows that Bucher Industries had debt of CHF143.3m at the end of December 2020, a reduction from CHF241.7m over a year. However, it does have CHF551.1m in cash offsetting this, leading to net cash of CHF407.8m.

How Healthy Is Bucher Industries' Balance Sheet?

The latest balance sheet data shows that Bucher Industries had liabilities of CHF816.6m due within a year, and liabilities of CHF223.4m falling due after that. Offsetting this, it had CHF551.1m in cash and CHF460.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF28.2m.

This state of affairs indicates that Bucher Industries' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CHF4.86b company is short on cash, but still worth keeping an eye on the balance sheet. 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 fact Bucher Industries's saving grace is its low debt levels, because its EBIT has tanked 26% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Bucher Industries's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Bucher Industries 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, Bucher Industries recorded free cash flow worth 74% 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

We could understand if investors are concerned about Bucher Industries's liabilities, but we can be reassured by the fact it has has net cash of CHF407.8m. And it impressed us with free cash flow of CHF308m, being 74% of its EBIT. So we are not troubled with Bucher Industries's debt use. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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