Is Bosch (NSE:BOSCHLTD) 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 note that Bosch Limited (NSE:BOSCHLTD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Bosch

What Is Bosch's Debt?

As you can see below, Bosch had ₹460.0m of debt at September 2023, down from ₹616.0m a year prior. However, its balance sheet shows it holds ₹30.3b in cash, so it actually has ₹29.9b net cash.

How Healthy Is Bosch's Balance Sheet?

We can see from the most recent balance sheet that Bosch had liabilities of ₹47.0b falling due within a year, and liabilities of ₹2.30b due beyond that. Offsetting this, it had ₹30.3b in cash and ₹33.4b in receivables that were due within 12 months. So it actually has ₹14.4b 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 ₹870.0b 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!

Another good sign is that Bosch has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bosch can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Bosch reported free cash flow worth 14% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Bosch has net cash of ₹29.9b, as well as more liquid assets than liabilities. And we liked the look of last year's 24% 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. For instance, we've identified 3 warning signs for Bosch (1 makes us a bit uncomfortable) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.