UFP Industries (NASDAQ:UFPI) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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. We note that UFP Industries, Inc. (NASDAQ:UFPI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See 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$277.2m of debt in July 2023, down from US$328.7m, one year before. However, it does have US$740.6m in cash offsetting this, leading to net cash of US$463.4m.

A Look At UFP Industries' Liabilities

Zooming in on the latest balance sheet data, we can see that UFP Industries had liabilities of US$556.0m due within 12 months and liabilities of US$446.2m due beyond that. Offsetting these obligations, it had cash of US$740.6m as well as receivables valued at US$819.3m due within 12 months. So it can boast US$557.7m more liquid assets than total liabilities.

This short term liquidity is a sign that UFP Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, UFP Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, UFP Industries's EBIT dived 17%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine UFP Industries's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 63% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case UFP Industries has US$463.4m in net cash and a decent-looking balance sheet. So we are not troubled with UFP Industries's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with UFP Industries , and understanding them should be part of your investment process.

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.