Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT) makes use of debt. But the real question is whether this debt is making the company risky.
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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is J.B. Hunt Transport Services's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 J.B. Hunt Transport Services had US$1.17b of debt, an increase on US$1.07b, over one year. However, because it has a cash reserve of US$75.1m, its net debt is less, at about US$1.09b.
How Healthy Is J.B. Hunt Transport Services's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that J.B. Hunt Transport Services had liabilities of US$1.04b due within 12 months and liabilities of US$2.12b due beyond that. Offsetting this, it had US$75.1m in cash and US$1.05b in receivables that were due within 12 months. So its liabilities total US$2.03b more than the combination of its cash and short-term receivables.
Of course, J.B. Hunt Transport Services has a titanic market capitalization of US$12.5b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
J.B. Hunt Transport Services has a low net debt to EBITDA ratio of only 0.93. And its EBIT covers its interest expense a whopping 13.5 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. While J.B. Hunt Transport Services doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if J.B. Hunt Transport Services can strengthen its balance sheet over time. 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. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, J.B. Hunt Transport Services recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
When it comes to the balance sheet, the standout positive for J.B. Hunt Transport Services was the fact that it seems able to cover its interest expense with its EBIT confidently. However, our other observations weren't so heartening. For example, its conversion of EBIT to free cash flow makes us a little nervous about its debt. Considering this range of data points, we think J.B. Hunt Transport Services is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. We'd be motivated to research the stock further if we found out that J.B. Hunt Transport Services insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
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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