These 4 Measures Indicate That BlueLinx Holdings (NYSE:BXC) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that BlueLinx Holdings Inc. (NYSE:BXC) does use debt in its business. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Net Debt?

The chart below, which you can click on for greater detail, shows that BlueLinx Holdings had US$292.4m in debt in December 2022; about the same as the year before. However, it does have US$298.9m in cash offsetting this, leading to net cash of US$6.52m.

How Strong Is BlueLinx Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BlueLinx Holdings had liabilities of US$210.7m due within 12 months and liabilities of US$689.3m due beyond that. Offsetting this, it had US$298.9m in cash and US$261.5m in receivables that were due within 12 months. So it has liabilities totalling US$339.6m more than its cash and near-term receivables, combined.

BlueLinx Holdings has a market capitalization of US$733.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, BlueLinx Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that BlueLinx Holdings has increased its EBIT by 2.4% over twelve months, which should ease any concerns about debt repayment. 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 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 produced sturdy free cash flow equating to 55% 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

Although BlueLinx Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$6.52m. So we are not troubled with BlueLinx Holdings'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for BlueLinx Holdings you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.