BJ’s Wholesale Club Holdings (NYSE: BJ) appears to be using debt quite wisely

Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. 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. Like many other companies BJ’s Wholesale Club Holdings, Inc. (NYSE: BJ) uses debt. But does this debt worry shareholders?

Why Does Debt Bring Risk?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.

Check out our latest review for BJ’s Wholesale Club Holdings

What is the net debt of BJ’s Wholesale Club Holdings?

You can click on the graph below for historical numbers, but it shows that BJ’s Wholesale Club Holdings had $ 756.5 million in debt as of October 2021, down from $ 1.15 billion a year earlier. However, it has US $ 84.7 million in cash offsetting this, which leads to net debt of around US $ 671.8 million.

NYSE Debt to Equity History: BJ January 10, 2022

A look at the liabilities of BJ’s Wholesale Club Holdings

The latest balance sheet data shows that BJ’s Wholesale Club Holdings had US $ 2.10 billion in liabilities due within one year, and US $ 3.04 billion in liabilities due thereafter. In return, he had $ 84.7 million in cash and $ 200.3 million in receivables due within 12 months. Its liabilities therefore total $ 4.86 billion more than the combination of its cash and short-term receivables.

While this may sound like a lot, it isn’t that big of a deal since BJ’s Wholesale Club Holdings has a market capitalization of US $ 8.94 billion, and therefore could likely strengthen its balance sheet by raising capital if needed. But we absolutely want to keep our eyes open for indications that its debt is too risky.

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 look at debt versus earnings with and without amortization expenses.

With net debt of just 0.86 times EBITDA, BJ’s Wholesale Club Holdings is arguably fairly conservative. And this view is underpinned by strong interest coverage, with EBIT reaching 9.6 times last year’s interest expense. While BJ’s Wholesale Club Holdings doesn’t appear to have gained much on the EBIT line, at least profits remain stable for now. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether BJ’s Wholesale Club Holdings can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, a business can only repay its debts with hard cash, not with accounting profits. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, BJ’s Wholesale Club Holdings has generated free cash flow of a very solid 92% of its EBIT, more than we expected. This puts him in a very strong position to pay off the debt.

Our point of view

The good news is that BJ’s Wholesale Club Holdings demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a little concerned with its total liability level. All these things considered, it looks like BJ’s Wholesale Club Holdings can comfortably manage its current debt levels. On the plus side, this leverage can increase returns to shareholders, but the potential downside is more risk of loss, so it’s worth watching the balance sheet. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you need to know the 1 warning sign we spotted with BJ’s Wholesale Club Holdings.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

About Timothy Cheatham

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