Boise Cascade (NYSE:BCC) Seems To Use Debt Rather Sparingly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Boise Cascade Company (NYSE:BCC) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Boise Cascade

What Is Boise Cascade's Debt?

The chart below, which you can click on for greater detail, shows that Boise Cascade had US$444.2m in debt in September 2022; about the same as the year before. However, it does have US$867.1m in cash offsetting this, leading to net cash of US$422.9m.

How Strong Is Boise Cascade's Balance Sheet?

We can see from the most recent balance sheet that Boise Cascade had liabilities of US$739.5m falling due within a year, and liabilities of US$626.0m due beyond that. Offsetting these obligations, it had cash of US$867.1m as well as receivables valued at US$529.2m due within 12 months. So it can boast US$30.8m more liquid assets than total liabilities.

This state of affairs indicates that Boise Cascade's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$2.64b company is short on cash, but still worth keeping an eye on the 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.

On top of that, Boise Cascade grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Boise Cascade's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Boise Cascade 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, Boise Cascade produced sturdy free cash flow equating to 66% 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 we empathize with investors who find debt concerning, you should keep in mind that Boise Cascade has net cash of US$422.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 47% over the last year. So is Boise Cascade's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Boise Cascade is showing 2 warning signs in our investment analysis , and 1 of those is significant...

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.