These 4 Measures Indicate That ArcBest (NASDAQ:ARCB) Is Using Debt Reasonably Well

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 ArcBest Corporation (NASDAQ:ARCB) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ArcBest

How Much Debt Does ArcBest Carry?

As you can see below, ArcBest had US$203.6m of debt at June 2024, down from US$233.0m a year prior. But it also has US$260.5m in cash to offset that, meaning it has US$56.9m net cash.

A Look At ArcBest's Liabilities

The latest balance sheet data shows that ArcBest had liabilities of US$645.9m due within a year, and liabilities of US$531.1m falling due after that. Offsetting this, it had US$260.5m in cash and US$441.4m in receivables that were due within 12 months. So its liabilities total US$475.2m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since ArcBest has a market capitalization of US$2.36b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

But the bad news is that ArcBest has seen its EBIT plunge 15% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, ArcBest produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While ArcBest does have more liabilities than liquid assets, it also has net cash of US$56.9m. So we don't have any problem with ArcBest's use of debt. We'd be motivated to research the stock further if we found out that ArcBest insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.