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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Oshkosh Corporation (NYSE:OSK) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Our analysis indicates that OSK is potentially undervalued!

What Is Oshkosh's Net Debt?

The image below, which you can click on for greater detail, shows that Oshkosh had debt of US$604.6m at the end of June 2022, a reduction from US$818.6m over a year. On the flip side, it has US$397.4m in cash leading to net debt of about US$207.2m.

How Strong Is Oshkosh's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Oshkosh had liabilities of US$2.34b due within 12 months and liabilities of US$1.64b due beyond that. On the other hand, it had cash of US$397.4m and US$2.00b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.59b.

While this might seem like a lot, it is not so bad since Oshkosh has a market capitalization of US$5.56b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Oshkosh'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.

Over 12 months, Oshkosh made a loss at the EBIT level, and saw its revenue drop to US$7.1b, which is a fall of 5.1%. We would much prefer see growth.

Caveat Emptor

Importantly, Oshkosh had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$171m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$1.4b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Oshkosh has 1 warning sign we think you should be aware of.

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.

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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.