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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Old Dominion Freight Line, Inc. (NASDAQ:ODFL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Old Dominion Freight Line's Debt?
You can click the graphic below for the historical numbers, but it shows that Old Dominion Freight Line had US$99.9m of debt in June 2021, down from US$144.9m, one year before. But it also has US$649.5m in cash to offset that, meaning it has US$549.5m net cash.
A Look At Old Dominion Freight Line's Liabilities
The latest balance sheet data shows that Old Dominion Freight Line had liabilities of US$482.0m due within a year, and liabilities of US$650.1m falling due after that. Offsetting this, it had US$649.5m in cash and US$505.7m in receivables that were due within 12 months. So it actually has US$23.1m more liquid assets than total liabilities.
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$34.4b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Old Dominion Freight Line boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Old Dominion Freight Line grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. Old Dominion Freight Line 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, Old Dominion Freight Line produced sturdy free cash flow equating to 68% 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.
While we empathize with investors who find debt concerning, you should keep in mind that Old Dominion Freight Line has net cash of US$549.5m, as well as more liquid assets than liabilities. And we liked the look of last year's 47% year-on-year EBIT growth. So we don't think Old Dominion Freight Line's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Old Dominion Freight Line that you should be aware of.
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.
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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