Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, ArcBest Corporation (NASDAQ:ARCB) does carry debt. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is ArcBest's Net Debt?
As you can see below, at the end of June 2019, ArcBest had US$282.6m of debt, up from US$249.6m a year ago. Click the image for more detail. But it also has US$299.4m in cash to offset that, meaning it has US$16.8m net cash.
How Strong Is ArcBest's Balance Sheet?
The latest balance sheet data shows that ArcBest had liabilities of US$471.5m due within a year, and liabilities of US$419.3m falling due after that. Offsetting this, it had US$299.4m in cash and US$313.3m in receivables that were due within 12 months. So its liabilities total US$278.1m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since ArcBest has a market capitalization of US$724.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, ArcBest boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, ArcBest grew its EBIT by 33% 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 ArcBest's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While ArcBest 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. Happily for any shareholders, ArcBest actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While ArcBest does have more liabilities than liquid assets, it also has net cash of US$17m. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in US$145m. So we don't think ArcBest's use of debt is risky. Another factor that would give us confidence in ArcBest would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.