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Does Landstar System (NASDAQ:LSTR) Have A Healthy Balance Sheet?

Simply Wall St

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Landstar System, Inc. (NASDAQ:LSTR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Landstar System

What Is Landstar System's Debt?

The image below, which you can click on for greater detail, shows that Landstar System had debt of US$43.6m at the end of June 2019, a reduction from US$149.3m over a year. However, its balance sheet shows it holds US$285.4m in cash, so it actually has US$241.7m net cash.

NasdaqGS:LSTR Historical Debt, August 19th 2019

A Look At Landstar System's Liabilities

We can see from the most recent balance sheet that Landstar System had liabilities of US$474.3m falling due within a year, and liabilities of US$146.1m due beyond that. On the other hand, it had cash of US$285.4m and US$621.3m worth of receivables due within a year. So it actually has US$286.3m more liquid assets than total liabilities.

This surplus suggests that Landstar System has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Landstar System boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Landstar System grew its EBIT by 16% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Landstar System 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Landstar System 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, Landstar System produced sturdy free cash flow equating to 77% 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

While it is always sensible to investigate a company's debt, in this case Landstar System has US$242m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$354m, being 77% of its EBIT. So we don't think Landstar System's use of debt is risky. We'd be very excited to see if Landstar System 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.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.