BlueLinx Holdings (NYSE:BXC) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, BlueLinx Holdings Inc. (NYSE:BXC) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

Check out our latest analysis for BlueLinx Holdings

What Is BlueLinx Holdings's Net Debt?

As you can see below, BlueLinx Holdings had US$293.7m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$521.7m in cash, leading to a US$228.0m net cash position.

How Healthy Is BlueLinx Holdings' Balance Sheet?

The latest balance sheet data shows that BlueLinx Holdings had liabilities of US$218.6m due within a year, and liabilities of US$684.8m falling due after that. Offsetting these obligations, it had cash of US$521.7m as well as receivables valued at US$228.4m due within 12 months. So its liabilities total US$153.2m more than the combination of its cash and short-term receivables.

Of course, BlueLinx Holdings has a market capitalization of US$1.11b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, BlueLinx Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, BlueLinx Holdings's EBIT fell a jaw-dropping 70% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine BlueLinx Holdings'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 BlueLinx Holdings 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, BlueLinx Holdings produced sturdy free cash flow equating to 78% 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 BlueLinx Holdings does have more liabilities than liquid assets, it also has net cash of US$228.0m. And it impressed us with free cash flow of US$279m, being 78% of its EBIT. So we don't have any problem with BlueLinx Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with BlueLinx Holdings , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.