UFP Industries (NASDAQ: UFPI) has a fairly healthy balance sheet
Warren Buffett said: “Volatility is far from synonymous with risk”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We notice that UFP Industries, Inc. (NASDAQ: UFPI) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
When Is Debt a Problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest analysis for UFP Industries
What is the net debt of UFP Industries?
The image below, which you can click for more details, shows that in March 2021, UFP Industries was in debt of US $ 473.6 million, up from US $ 163.3 million in one year. However, he also had $ 75.8 million in cash, so his net debt is $ 397.7 million.
Is UFP Industries’ balance sheet healthy?
Zooming in on the latest balance sheet data, we can see that UFP Industries had a liability of US $ 611.0 million due within 12 months and a liability of US $ 588.5 million due beyond. In return, he had $ 75.8 million in cash and $ 811.5 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 312.2 million.
Given that publicly traded UFP Industries shares are worth a total of US $ 4.71 billion, it seems unlikely that this level of liabilities is a major threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
UFP Industries has a low net debt to EBITDA ratio of just 0.78. And its EBIT easily covers its interest costs, being 54.6 times higher. So we’re pretty relaxed about its ultra-conservative use of debt. On top of that, we are happy to report that UFP Industries has increased its EBIT by 69%, reducing the specter of future debt repayments. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine UFP Industries’ ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, UFP Industries’ free cash flow has amounted to 45% of its EBIT, less than we expected. This low cash conversion makes debt management more difficult.
Our point of view
Fortunately, UFP Industries’ impressive interest coverage means it has the upper hand over its debt. And the good news doesn’t end there, because its EBIT growth rate also supports this impression! Looking at the big picture, we think UFP Industries’ use of debt looks very reasonable and we don’t care. While debt comes with risk, when used wisely, it can also generate a better return on equity. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 1 warning sign for UFP Industries which you should know before investing here.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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