- Oops!Something went wrong.Please try again later.
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 UFP Industries, Inc. (NASDAQ:UFPI) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is UFP Industries's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 UFP Industries had US$314.0m of debt, an increase on US$163.0m, over one year. However, it does have US$366.7m in cash offsetting this, leading to net cash of US$52.7m.
A Look At UFP Industries's Liabilities
Zooming in on the latest balance sheet data, we can see that UFP Industries had liabilities of US$493.6m due within 12 months and liabilities of US$443.2m due beyond that. Offsetting these obligations, it had cash of US$366.7m as well as receivables valued at US$587.2m due within 12 months. So these liquid assets roughly match the total liabilities.
Having regard to UFP Industries's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$3.31b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, UFP Industries boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that UFP Industries has boosted its EBIT by 30%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine UFP Industries'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. UFP Industries 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, UFP Industries produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While we empathize with investors who find debt concerning, you should keep in mind that UFP Industries has net cash of US$52.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 30% year-on-year EBIT growth. So is UFP Industries's debt a risk? It doesn't seem so to us. We'd be very excited to see if UFP Industries insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.