Stock Analysis

Does Quanex Building Products (NYSE:NX) Have A Healthy Balance Sheet?

NYSE:NX
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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.' 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 note that Quanex Building Products Corporation (NYSE:NX) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Quanex Building Products

How Much Debt Does Quanex Building Products Carry?

As you can see below, at the end of October 2023, Quanex Building Products had US$13.8m of debt, up from US$11.5m a year ago. Click the image for more detail. However, it does have US$58.5m in cash offsetting this, leading to net cash of US$44.7m.

debt-equity-history-analysis
NYSE:NX Debt to Equity History February 13th 2024

How Strong Is Quanex Building Products' Balance Sheet?

According to the last reported balance sheet, Quanex Building Products had liabilities of US$134.7m due within 12 months, and liabilities of US$150.9m due beyond 12 months. Offsetting this, it had US$58.5m in cash and US$105.6m in receivables that were due within 12 months. So its liabilities total US$121.5m more than the combination of its cash and short-term receivables.

Of course, Quanex Building Products has a market capitalization of US$1.12b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Quanex Building Products boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Quanex Building Products saw its EBIT drop by 6.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Quanex Building Products can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. Quanex Building Products 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. Over the most recent three years, Quanex Building Products recorded free cash flow worth 76% 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

Although Quanex Building Products'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$44.7m. And it impressed us with free cash flow of US$110m, being 76% of its EBIT. So is Quanex Building Products's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Quanex Building Products 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.

Valuation is complex, but we're here to simplify it.

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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.