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. 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 note that Schneider National, Inc. (NYSE:SNDR) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Schneider National’s Debt?
The image below, which you can click on for greater detail, shows that Schneider National had debt of US$359.6m at the end of December 2019, a reduction from US$404.4m over a year. However, its balance sheet shows it holds US$599.9m in cash, so it actually has US$240.3m net cash.
How Strong Is Schneider National’s Balance Sheet?
We can see from the most recent balance sheet that Schneider National had liabilities of US$465.2m falling due within a year, and liabilities of US$958.5m due beyond that. Offsetting these obligations, it had cash of US$599.9m as well as receivables valued at US$633.8m due within 12 months. So it has liabilities totalling US$190.0m more than its cash and near-term receivables, combined.
Given Schneider National has a market capitalization of US$3.80b, it’s hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Schneider National also has more cash than debt, so we’re pretty confident it can manage its debt safely.
But the other side of the story is that Schneider National saw its EBIT decline by 10.0% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Schneider National’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 business needs free cash flow to pay off debt; accounting profits just don’t cut it. While Schneider National 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, Schneider National created free cash flow amounting to 15% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.
While it is always sensible to look at a company’s total liabilities, it is very reassuring that Schneider National has US$240.3m in net cash. So we don’t have any problem with Schneider National’s use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we’ve discovered 2 warning signs for Schneider National that you should be aware of before investing here.
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.
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.
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