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

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. Importantly, Bajaj Auto Limited (NSE:BAJAJ-AUTO) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Bajaj Auto

What Is Bajaj Auto's Net Debt?

As you can see below, at the end of September 2024, Bajaj Auto had ₹51.2b of debt, up from none a year ago. Click the image for more detail. However, it does have ₹77.1b in cash offsetting this, leading to net cash of ₹25.9b.

How Healthy Is Bajaj Auto's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bajaj Auto had liabilities of ₹105.8b due within 12 months and liabilities of ₹42.8b due beyond that. Offsetting these obligations, it had cash of ₹77.1b as well as receivables valued at ₹41.1b due within 12 months. So it has liabilities totalling ₹30.4b more than its cash and near-term receivables, combined.

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 ₹2.48t 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.

Another good sign is that Bajaj Auto has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. 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 Bajaj Auto can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Bajaj Auto recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Bajaj Auto's liabilities, but we can be reassured by the fact it has has net cash of ₹25.9b. And it impressed us with its EBIT growth of 24% over the last year. So we don't think Bajaj Auto's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Bajaj Auto is showing 1 warning sign in our investment analysis , you should know about...

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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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.