Is West Fraser Timber (TSE:WFG) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies West Fraser Timber Co. Ltd. (TSE:WFG) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for West Fraser Timber

What Is West Fraser Timber's Debt?

As you can see below, West Fraser Timber had US$500.0m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$997.0m in cash to offset that, meaning it has US$497.0m net cash.

How Strong Is West Fraser Timber's Balance Sheet?

We can see from the most recent balance sheet that West Fraser Timber had liabilities of US$1.23b falling due within a year, and liabilities of US$891.0m due beyond that. Offsetting this, it had US$997.0m in cash and US$393.0m in receivables that were due within 12 months. So it has liabilities totalling US$735.0m more than its cash and near-term receivables, combined.

Of course, West Fraser Timber has a market capitalization of US$7.27b, so these liabilities are probably manageable. 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, West Fraser Timber also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although West Fraser Timber made a loss at the EBIT level, last year, it was also good to see that it generated US$52m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if West Fraser Timber 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, a company can only pay off debt with cold hard cash, not accounting profits. While West Fraser Timber 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. Over the last year, West Fraser Timber actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although West Fraser Timber's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$497.0m. The cherry on top was that in converted 185% of that EBIT to free cash flow, bringing in US$96m. So we don't think West Fraser Timber's use of debt is risky. While West Fraser Timber didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.