Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Boise Cascade Company (NYSE:BCC) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. 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, 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.
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How Much Debt Does Boise Cascade Carry?
The chart below, which you can click on for greater detail, shows that Boise Cascade had US$445.3m in debt in December 2023; about the same as the year before. However, its balance sheet shows it holds US$949.6m in cash, so it actually has US$504.3m net cash.
How Strong Is Boise Cascade’s Balance Sheet?
The latest balance sheet data shows that Boise Cascade had liabilities of US$594.1m due within a year, and liabilities of US$668.9m falling due after that. Offsetting this, it had US$949.6m in cash and US$373.7m in receivables that were due within 12 months. So it actually has US$60.3m more liquid assets than total liabilities.
Having regard to Boise Cascade’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$5.37b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Simply put, the fact that Boise Cascade has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact Boise Cascade’s saving grace is its low debt levels, because its EBIT has tanked 45% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Boise Cascade can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Boise Cascade 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 most recent three years, Boise Cascade recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Boise Cascade has net cash of US$504.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$472m, being 71% of its EBIT. So we are not troubled with Boise Cascade’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. These risks can be hard to spot. Every company has them, and we’ve spotted 4 warning signs for Boise Cascade (of which 1 can’t be ignored!) 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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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.