Here's Why Oshkosh (NYSE:OSK) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Oshkosh Corporation (NYSE:OSK) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Oshkosh

What Is Oshkosh's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Oshkosh had US$654.8m of debt in March 2021, down from US$822.3m, one year before. However, its balance sheet shows it holds US$1.09b in cash, so it actually has US$438.4m net cash.

A Look At Oshkosh's Liabilities

The latest balance sheet data shows that Oshkosh had liabilities of US$1.90b due within a year, and liabilities of US$1.42b falling due after that. Offsetting this, it had US$1.09b in cash and US$1.34b in receivables that were due within 12 months. So its liabilities total US$894.9m more than the combination of its cash and short-term receivables.

Given Oshkosh has a market capitalization of US$8.23b, it's hard to believe these liabilities pose much threat. 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, Oshkosh boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Oshkosh's load is not too heavy, because its EBIT was down 31% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Oshkosh 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Oshkosh 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. During the last three years, Oshkosh generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While Oshkosh does have more liabilities than liquid assets, it also has net cash of US$438.4m. And it impressed us with free cash flow of US$853m, being 83% of its EBIT. So we are not troubled with Oshkosh's debt use. 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. Be aware that Oshkosh is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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