Is Bajaj Auto (NSE:BAJAJ-AUTO) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Bajaj Auto Limited (NSE:BAJAJ-AUTO) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Bajaj Auto

What Is Bajaj Auto's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Bajaj Auto had ₹17.9b of debt, an increase on none, over one year. But on the other hand it also has ₹63.9b in cash, leading to a ₹46.0b net cash position.

How Strong Is Bajaj Auto's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bajaj Auto had liabilities of ₹90.9b due within 12 months and liabilities of ₹12.9b due beyond that. On the other hand, it had cash of ₹63.9b and ₹22.8b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹17.1b.

Having regard to Bajaj Auto's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹2.68t company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Bajaj Auto also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Bajaj Auto grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Bajaj Auto'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Bajaj Auto 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, Bajaj Auto recorded free cash flow worth 59% 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 Bajaj Auto has ₹46.0b in net cash. And we liked the look of last year's 37% year-on-year EBIT growth. So is Bajaj Auto's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Bajaj Auto is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com