Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Best Buy Co., Inc. (NYSE:BBY) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Best Buy's Debt?

As you can see below, Best Buy had US$1.13b of debt, at February 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$1.45b in cash, so it actually has US$316.0m net cash.

How Healthy Is Best Buy's Balance Sheet?

The latest balance sheet data shows that Best Buy had liabilities of US$7.91b due within a year, and liabilities of US$4.01b falling due after that. Offsetting this, it had US$1.45b in cash and US$939.0m in receivables that were due within 12 months. So it has liabilities totalling US$9.53b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its very significant market capitalization of US$15.9b, so it does suggest shareholders should keep an eye on Best Buy's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Best Buy also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Best Buy's EBIT dived 11%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Best Buy 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Best Buy has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Best Buy produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Best Buy'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$316.0m. So we are not troubled with Best Buy's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Best Buy you should be aware of, and 1 of them is a bit concerning.

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.

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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.