Is Bosch (NSE:BOSCHLTD) A Risky Investment?

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 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 Bosch Limited (NSE:BOSCHLTD) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Bosch

What Is Bosch's Debt?

You can click the graphic below for the historical numbers, but it shows that Bosch had ₹532.0m of debt in March 2023, down from ₹729.0m, one year before. But it also has ₹27.4b in cash to offset that, meaning it has ₹26.9b net cash.

How Strong Is Bosch's Balance Sheet?

The latest balance sheet data shows that Bosch had liabilities of ₹50.2b due within a year, and liabilities of ₹2.24b falling due after that. Offsetting these obligations, it had cash of ₹27.4b as well as receivables valued at ₹33.9b due within 12 months. So it can boast ₹8.79b more liquid assets than total liabilities.

Having regard to Bosch's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹538.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Bosch boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Bosch grew its EBIT at 16% over the last year, further increasing its ability to manage debt. 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 Bosch'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 Bosch 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. Looking at the most recent three years, Bosch recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Bosch has ₹26.9b in net cash and a decent-looking balance sheet. And we liked the look of last year's 16% year-on-year EBIT growth. So is Bosch's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Bosch you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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

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.