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

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

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Mainfreight

What Is Mainfreight's Net Debt?

As you can see below, at the end of March 2023, Mainfreight had NZ$186.8m of debt, up from NZ$176.0m a year ago. Click the image for more detail. But it also has NZ$342.0m in cash to offset that, meaning it has NZ$155.2m net cash.

A Look At Mainfreight's Liabilities

The latest balance sheet data shows that Mainfreight had liabilities of NZ$866.1m due within a year, and liabilities of NZ$850.1m falling due after that. On the other hand, it had cash of NZ$342.0m and NZ$641.9m worth of receivables due within a year. So it has liabilities totalling NZ$732.4m more than its cash and near-term receivables, combined.

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!

Also good is that Mainfreight grew its EBIT at 20% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Mainfreight produced sturdy free cash flow equating to 71% 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.

Summing Up

Although Mainfreight's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of NZ$155.2m. And it impressed us with free cash flow of NZ$433m, being 71% of its EBIT. So is Mainfreight's debt a risk? It doesn't seem so to us. We'd be very excited to see if Mainfreight insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.