We Think Bajaj Auto (NSE:BAJAJ-AUTO) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Bajaj Auto Limited (NSE:BAJAJ-AUTO) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Bajaj Auto

How Much Debt Does Bajaj Auto Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Bajaj Auto had ₹51.2b of debt, an increase on none, over one year. However, it does have ₹77.1b in cash offsetting this, leading to net cash of ₹25.9b.

A Look At Bajaj Auto's Liabilities

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. On the other hand, it had cash of ₹77.1b and ₹41.1b worth of receivables due within a year. 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 while it's hard to imagine that the ₹2.76t company is struggling for cash, we still think it's worth monitoring its 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.

In addition to that, we're happy to report that Bajaj Auto has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. In the last three years, Bajaj Auto's free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Bajaj Auto has ₹25.9b in net cash. And it impressed us with its EBIT growth of 31% over the last year. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Bajaj Auto you should be aware of, and 1 of them is significant.

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.