Mainfreight (NZSE:MFT) Seems To Use Debt Rather Sparingly

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 Mainfreight Limited (NZSE:MFT) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Mainfreight

What Is Mainfreight's Net Debt?

As you can see below, Mainfreight had NZ$176.0m of debt at March 2022, down from NZ$210.0m a year prior. But it also has NZ$202.3m in cash to offset that, meaning it has NZ$26.3m net cash.

How Strong Is Mainfreight's Balance Sheet?

According to the last reported balance sheet, Mainfreight had liabilities of NZ$900.9m due within 12 months, and liabilities of NZ$697.8m due beyond 12 months. Offsetting these obligations, it had cash of NZ$202.3m as well as receivables valued at NZ$805.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NZ$590.6m.

Since publicly traded Mainfreight shares are worth a total of NZ$6.93b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Mainfreight also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Mainfreight grew its EBIT by 80% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Mainfreight'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 company can only pay off debt with cold hard cash, not accounting profits. Mainfreight 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, Mainfreight produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

We could understand if investors are concerned about Mainfreight's liabilities, but we can be reassured by the fact it has has net cash of NZ$26.3m. And it impressed us with its EBIT growth of 80% over the last year. So we don't think Mainfreight's use of debt is risky. We'd be very excited to see if Mainfreight 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.

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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.