David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Landstar System, Inc. (NASDAQ:LSTR) uses debt. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

How much debt does the Landstar system carry?

As you can see below, at the end of June 2022, Landstar System had a debt of $113.6 million, compared to $70.6 million a year ago. Click on the image for more details. However, he has $119.8 million in cash to offset this, which translates to a net cash of $6.17 million.

How healthy is Landstar System’s balance sheet?

The latest balance sheet data shows that Landstar System had liabilities of $977.9 million due within the year, and liabilities of $182.3 million due thereafter. In return, he had $119.8 million in cash and $1.33 billion in receivables due within 12 months. So he actually has US$290.9 million After liquid assets than total liabilities.

This short-term liquidity is a sign that Landstar System could probably repay its debt easily, as its balance sheet is far from stretched. Simply put, the fact that Landstar System has more cash than debt is arguably a good indication that it can safely manage its debt.

On top of that, we are pleased to report that Landstar System increased its EBIT by 46%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Landstar System can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Although Landstar System has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how fast it’s building ( or erodes) this treasury. balance. Over the past three years, Landstar System has recorded free cash flow of 61% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.

Summary

While it’s always a good idea to investigate a company’s debt, in this case Landstar System has $6.17 million in net cash and a decent balance sheet. And it has impressed us with its 46% EBIT growth over the past year. We therefore do not believe that Landstar System’s use of debt is risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 2 warning signs for the Landstar system (1 is a little worrying) you should be aware.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.