We Think BlueLinx Holdings (NYSE:BXC) Can Stay On Top Of Its Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies BlueLinx Holdings Inc. (NYSE:BXC) makes use of debt. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for BlueLinx Holdings

How Much Debt Does BlueLinx Holdings Carry?

As you can see below, BlueLinx Holdings had US$294.4m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$491.4m in cash offsetting this, leading to net cash of US$197.0m.

A Look At BlueLinx Holdings' Liabilities

We can see from the most recent balance sheet that BlueLinx Holdings had liabilities of US$237.5m falling due within a year, and liabilities of US$696.3m due beyond that. Offsetting these obligations, it had cash of US$491.4m as well as receivables valued at US$273.5m due within 12 months. So its liabilities total US$168.8m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because BlueLinx Holdings is worth US$793.9m, and thus could probably raise enough capital to shore up 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!

Shareholders should be aware that BlueLinx Holdings's EBIT was down 46% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. BlueLinx Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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$197.0m. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in US$132m. 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 2 warning signs with BlueLinx Holdings , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.