David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Landstar System, Inc. (NASDAQ:LSTR) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Landstar System Carry?
The image below, which you can click on for greater detail, shows that at June 2021 Landstar System had debt of US$70.6m, up from US$35.5m in one year. But it also has US$239.0m in cash to offset that, meaning it has US$168.4m net cash.
A Look At Landstar System's Liabilities
We can see from the most recent balance sheet that Landstar System had liabilities of US$720.2m falling due within a year, and liabilities of US$152.8m due beyond that. Offsetting this, it had US$239.0m in cash and US$952.8m in receivables that were due within 12 months. So it can boast US$318.7m 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!
On top of that, Landstar System grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Landstar System'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Landstar System 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. During the last three years, Landstar System produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to investigate a company's debt, in this case Landstar System has US$168.4m in net cash and a decent-looking balance sheet. And we liked the look of last year's 58% year-on-year EBIT growth. So is Landstar System's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Landstar System that you should be aware of before investing here.
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.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
In This StoryLSTR
Latest Nasdaq-Listed Companies Videos
- Altimeter is on track to Grab its target
- As Clover Health Investments, Corp.'s market cap (NASDAQ:CLOV) drops to US$2.0b, insiders might be questioning their decision to buy earlier this year
- Insiders are probably glad they sold their shares in Walgreens Boots Alliance, Inc. (NASDAQ:WBA) after 6.2% drop
- Some Activision Blizzard, Inc. (NASDAQ:ATVI) Shareholders Look For Exit As Shares Take 25% Pounding