Is Bajaj Electricals (NSE:BAJAJELEC) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Bajaj Electricals Limited (NSE:BAJAJELEC) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Bajaj Electricals

What Is Bajaj Electricals's Debt?

As you can see below, Bajaj Electricals had ₹600.3m of debt at September 2022, down from ₹3.12b a year prior. However, its balance sheet shows it holds ₹2.13b in cash, so it actually has ₹1.53b net cash.

A Look At Bajaj Electricals' Liabilities

We can see from the most recent balance sheet that Bajaj Electricals had liabilities of ₹24.3b falling due within a year, and liabilities of ₹1.14b due beyond that. On the other hand, it had cash of ₹2.13b and ₹14.1b worth of receivables due within a year. So its liabilities total ₹9.29b more than the combination of its cash and short-term receivables.

Of course, Bajaj Electricals has a market capitalization of ₹130.2b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Bajaj Electricals boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Bajaj Electricals has boosted its EBIT by 49%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bajaj Electricals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Bajaj Electricals 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. Happily for any shareholders, Bajaj Electricals actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Bajaj Electricals's liabilities, but we can be reassured by the fact it has has net cash of ₹1.53b. And it impressed us with free cash flow of ₹5.1b, being 276% of its EBIT. So we don't think Bajaj Electricals's use of debt is risky. 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. Be aware that Bajaj Electricals 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.

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.