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Oshkosh (NYSE:OSK) Seems To Use Debt Quite Sensibly

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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.' 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 note that Oshkosh Corporation (NYSE:OSK) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Oshkosh

What Is Oshkosh's Net Debt?

As you can see below, Oshkosh had US$818.6m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$1.17b in cash, leading to a US$347.7m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Oshkosh's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Oshkosh had liabilities of US$2.05b due within 12 months and liabilities of US$1.43b due beyond that. Offsetting this, it had US$1.17b in cash and US$1.80b in receivables that were due within 12 months. So it has liabilities totalling US$509.8m more than its cash and near-term receivables, combined.

Of course, Oshkosh has a market capitalization of US$7.77b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

But the other side of the story is that Oshkosh saw its EBIT decline by 2.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Oshkosh has US$347.7m in net cash. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in US$997m. So is Oshkosh's debt a risk? It doesn't seem so to us. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Oshkosh insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.

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.

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