Is Bucher Industries (VTX:BUCN) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 can see that Bucher Industries AG (VTX:BUCN) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Bucher Industries

What Is Bucher Industries's Debt?

As you can see below, Bucher Industries had CHF120.2m of debt at December 2022, down from CHF151.8m a year prior. However, it does have CHF579.3m in cash offsetting this, leading to net cash of CHF459.1m.

How Healthy Is Bucher Industries' Balance Sheet?

We can see from the most recent balance sheet that Bucher Industries had liabilities of CHF1.08b falling due within a year, and liabilities of CHF192.7m due beyond that. On the other hand, it had cash of CHF579.3m and CHF630.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF67.0m.

Having regard to Bucher Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CHF4.20b 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.

Also positive, Bucher Industries grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 65% 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 look at a company's total liabilities, it is very reassuring that Bucher Industries has CHF459.1m in net cash. And we liked the look of last year's 22% year-on-year EBIT growth. So we don't think Bucher Industries's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Bucher Industries (2 don't sit too well with us!) that you should be aware of before investing here.

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.