ArcBest (NASDAQ:ARCB) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies ArcBest Corporation (NASDAQ:ARCB) makes use of debt. But is this debt a concern to shareholders?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ArcBest

How Much Debt Does ArcBest Carry?

The image below, which you can click on for greater detail, shows that ArcBest had debt of US$284.2m at the end of December 2020, a reduction from US$324.1m over a year. However, it does have US$369.4m in cash offsetting this, leading to net cash of US$85.1m.

How Strong Is ArcBest's Balance Sheet?

We can see from the most recent balance sheet that ArcBest had liabilities of US$506.5m falling due within a year, and liabilities of US$443.9m due beyond that. Offsetting this, it had US$369.4m in cash and US$335.2m in receivables that were due within 12 months. So it has liabilities totalling US$245.8m more than its cash and near-term receivables, combined.

Since publicly traded ArcBest shares are worth a total of US$1.50b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, ArcBest boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that ArcBest has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, ArcBest actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although ArcBest's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$85.1m. And it impressed us with free cash flow of US$149m, being 140% of its EBIT. So is ArcBest's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that ArcBest is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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. 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.
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