Is ArcBest (NASDAQ:ARCB) A Risky Investment?

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.' 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. Importantly, ArcBest Corporation (NASDAQ:ARCB) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ArcBest

How Much Debt Does ArcBest Carry?

You can click the graphic below for the historical numbers, but it shows that ArcBest had US$228.9m of debt in December 2023, down from US$264.6m, one year before. But on the other hand it also has US$330.1m in cash, leading to a US$101.1m net cash position.

How Healthy Is ArcBest's Balance Sheet?

We can see from the most recent balance sheet that ArcBest had liabilities of US$701.6m falling due within a year, and liabilities of US$541.2m due beyond that. Offsetting these obligations, it had cash of US$330.1m as well as receivables valued at US$482.2m due within 12 months. So it has liabilities totalling US$430.4m more than its cash and near-term receivables, combined.

Since publicly traded ArcBest shares are worth a total of US$3.22b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, ArcBest also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that ArcBest's load is not too heavy, because its EBIT was down 51% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ArcBest 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ArcBest 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, ArcBest produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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$101.1m. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in US$90m. So we don't have any problem with ArcBest's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for ArcBest you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.