Here's Why BlueLinx Holdings (NYSE:BXC) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that BlueLinx Holdings Inc. (NYSE:BXC) does use debt in its business. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for BlueLinx Holdings

What Is BlueLinx Holdings's Debt?

The chart below, which you can click on for greater detail, shows that BlueLinx Holdings had US$294.7m in debt in September 2024; about the same as the year before. But it also has US$526.3m in cash to offset that, meaning it has US$231.5m net cash.

A Look At BlueLinx Holdings' Liabilities

The latest balance sheet data shows that BlueLinx Holdings had liabilities of US$257.7m due within a year, and liabilities of US$697.8m falling due after that. On the other hand, it had cash of US$526.3m and US$278.0m worth of receivables due within a year. So its liabilities total US$151.2m more than the combination of its cash and short-term receivables.

Since publicly traded BlueLinx Holdings shares are worth a total of US$1.02b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 37% 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. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While BlueLinx Holdings does have more liabilities than liquid assets, it also has net cash of US$231.5m. And it impressed us with free cash flow of US$114m, being 94% 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. However, not all investment risk resides within the balance sheet - far from it. For example - BlueLinx Holdings has 2 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.