Here's Why Boise Cascade (NYSE:BCC) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Boise Cascade Company (NYSE:BCC) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Boise Cascade

What Is Boise Cascade's Net Debt?

The chart below, which you can click on for greater detail, shows that Boise Cascade had US$446.2m in debt in December 2024; about the same as the year before. However, its balance sheet shows it holds US$714.2m in cash, so it actually has US$268.0m net cash.

A Look At Boise Cascade's Liabilities

The latest balance sheet data shows that Boise Cascade had liabilities of US$564.0m due within a year, and liabilities of US$654.1m falling due after that. Offsetting these obligations, it had cash of US$714.2m as well as receivables valued at US$344.8m due within 12 months. So it has liabilities totalling US$159.2m more than its cash and near-term receivables, combined.

Since publicly traded Boise Cascade shares are worth a total of US$3.82b, it seems unlikely that this level of liabilities would be a major threat. 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, Boise Cascade also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Boise Cascade's load is not too heavy, because its EBIT was down 23% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Boise Cascade 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 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. Over the most recent three years, Boise Cascade recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Boise Cascade's liabilities, but we can be reassured by the fact it has has net cash of US$268.0m. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in US$209m. So we are not troubled with Boise Cascade's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Boise Cascade that you should be aware of before investing here.

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.