Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Old Dominion Freight Line, Inc. (NASDAQ:ODFL) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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$45.0m of debt, at September 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have US$322.3m in cash offsetting this, leading to net cash of US$277.3m.
How Strong Is Old Dominion Freight Line's Balance Sheet?
The latest balance sheet data shows that Old Dominion Freight Line had liabilities of US$396.9m due within a year, and liabilities of US$586.0m falling due after that. Offsetting these obligations, it had cash of US$322.3m as well as receivables valued at US$438.1m due within 12 months. So it has liabilities totalling US$222.5m more than its cash and near-term receivables, combined.
This state of affairs indicates that Old Dominion Freight Line's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$14.9b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Old Dominion Freight Line boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Old Dominion Freight Line grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Old Dominion Freight Line 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. In the last three years, Old Dominion Freight Line's free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Old Dominion Freight Line has US$277.3m in net cash. And we liked the look of last year's 15% year-on-year EBIT growth. So is Old Dominion Freight Line's debt a risk? It doesn't seem so to us. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Old Dominion Freight Line insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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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