Mainfreight (NZSE:MFT) Has A Rock Solid Balance Sheet

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.' 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 can see that Mainfreight Limited (NZSE:MFT) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Mainfreight

How Much Debt Does Mainfreight Carry?

The image below, which you can click on for greater detail, shows that Mainfreight had debt of NZ$176.0m at the end of March 2022, a reduction from NZ$210.0m over a year. But on the other hand it also has NZ$202.3m in cash, leading to a NZ$26.3m net cash position.

How Healthy Is Mainfreight's Balance Sheet?

According to the last reported balance sheet, Mainfreight had liabilities of NZ$900.9m due within 12 months, and liabilities of NZ$697.8m due beyond 12 months. On the other hand, it had cash of NZ$202.3m and NZ$805.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NZ$590.6m.

Of course, Mainfreight has a market capitalization of NZ$7.16b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Mainfreight boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Mainfreight has boosted its EBIT by 79%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Mainfreight 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. Mainfreight 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. Over the most recent three years, Mainfreight recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Mainfreight's liabilities, but we can be reassured by the fact it has has net cash of NZ$26.3m. And we liked the look of last year's 79% year-on-year EBIT growth. So we don't think Mainfreight's use of debt is risky. Another factor that would give us confidence in Mainfreight 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, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.