Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Old Dominion Freight Line, Inc. (NASDAQ:ODFL) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Old Dominion Freight Line's Debt?
As you can see below, Old Dominion Freight Line had US$100.0m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$420.5m in cash, leading to a US$320.6m net cash position.
How Healthy Is Old Dominion Freight Line's Balance Sheet?
According to the last reported balance sheet, Old Dominion Freight Line had liabilities of US$628.2m due within 12 months, and liabilities of US$609.9m due beyond 12 months. Offsetting this, it had US$420.5m in cash and US$701.4m in receivables that were due within 12 months. So it has liabilities totalling US$116.1m more than its cash and near-term receivables, combined.
Having regard to Old Dominion Freight Line's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$35.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Old Dominion Freight Line also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Old Dominion Freight Line grew its EBIT by 44% 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 Old Dominion Freight Line'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Old Dominion Freight Line 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, Old Dominion Freight Line produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Old Dominion Freight Line has US$320.6m in net cash. And it impressed us with its EBIT growth of 44% over the last year. So is Old Dominion Freight Line's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Old Dominion Freight Line is showing 1 warning sign in our investment analysis , you should know about...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
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