West Fraser Timber (TSE:WFG) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does West Fraser Timber Carry?

As you can see below, West Fraser Timber had US$200.0m of debt at March 2025, down from US$499.0m a year prior. But on the other hand it also has US$390.0m in cash, leading to a US$190.0m net cash position.

A Look At West Fraser Timber's Liabilities

According to the last reported balance sheet, West Fraser Timber had liabilities of US$919.0m due within 12 months, and liabilities of US$912.0m due beyond 12 months. Offsetting this, it had US$390.0m in cash and US$459.0m in receivables that were due within 12 months. So its liabilities total US$982.0m more than the combination of its cash and short-term receivables.

Given West Fraser Timber has a market capitalization of US$5.84b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, West Fraser Timber boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for West Fraser Timber

But the bad news is that West Fraser Timber has seen its EBIT plunge 15% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 West Fraser Timber 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. West Fraser Timber 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. During the last three years, West Fraser Timber generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While West Fraser Timber does have more liabilities than liquid assets, it also has net cash of US$190.0m. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in US$158m. So we don't have any problem with West Fraser Timber's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for West Fraser Timber that 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.