Is UFP Industries (NASDAQ:UFPI) 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.' 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 UFP Industries, Inc. (NASDAQ:UFPI) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for UFP Industries

How Much Debt Does UFP Industries Carry?

You can click the graphic below for the historical numbers, but it shows that UFP Industries had US$278.0m of debt in April 2023, down from US$483.6m, one year before. However, it does have US$460.8m in cash offsetting this, leading to net cash of US$182.8m.

How Strong Is UFP Industries' Balance Sheet?

According to the last reported balance sheet, UFP Industries had liabilities of US$530.4m due within 12 months, and liabilities of US$454.0m due beyond 12 months. Offsetting these obligations, it had cash of US$460.8m as well as receivables valued at US$814.8m due within 12 months. So it actually has US$291.3m more liquid assets than total liabilities.

This surplus suggests that UFP Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, UFP Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

UFP Industries's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 UFP Industries 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 UFP Industries 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, UFP Industries produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case UFP Industries has US$182.8m in net cash and a decent-looking balance sheet. So we don't think UFP Industries's use of debt is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with UFP Industries (including 1 which can't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.