Is Oshkosh (NYSE:OSK) Using Too Much Debt?

Simply Wall St
February 18, 2022
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Oshkosh Corporation (NYSE:OSK) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Debt?

As you can see below, Oshkosh had US$819.0m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$995.7m in cash offsetting this, leading to net cash of US$176.7m.

NYSE:OSK Debt to Equity History February 18th 2022

How Healthy Is Oshkosh's Balance Sheet?

According to the last reported balance sheet, Oshkosh had liabilities of US$2.14b due within 12 months, and liabilities of US$1.50b due beyond 12 months. Offsetting these obligations, it had cash of US$995.7m as well as receivables valued at US$1.66b due within 12 months. So its liabilities total US$985.2m more than the combination of its cash and short-term receivables.

Given Oshkosh has a market capitalization of US$7.75b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Oshkosh also has more cash than debt, so we're pretty confident it can manage its debt safely.

Oshkosh's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of 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 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. Oshkosh 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. Over the last three years, Oshkosh recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually 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$176.7m. And it impressed us with free cash flow of US$556m, being 95% of its EBIT. So we don't think Oshkosh'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 Oshkosh is showing 1 warning sign in our investment analysis , you should know about...

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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