Is Heartland Express (NASDAQ:HTLD) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Heartland Express, Inc. (NASDAQ:HTLD) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Heartland Express

What Is Heartland Express's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Heartland Express had debt of US$10.9m, up from none in one year. However, its balance sheet shows it holds US$171.9m in cash, so it actually has US$161.0m net cash.

How Healthy Is Heartland Express' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Heartland Express had liabilities of US$126.4m due within 12 months and liabilities of US$168.9m due beyond that. Offsetting these obligations, it had cash of US$171.9m as well as receivables valued at US$98.8m due within 12 months. So its liabilities total US$24.6m more than the combination of its cash and short-term receivables.

Since publicly traded Heartland Express shares are worth a total of US$1.18b, 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, Heartland Express boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Heartland Express grew its EBIT by 4.2% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Heartland Express's ability to maintain a healthy balance sheet going forward. 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. Heartland Express 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, Heartland Express burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Heartland Express's liabilities, but we can be reassured by the fact it has has net cash of US$161.0m. And it also grew its EBIT by 4.2% over the last year. So we are not troubled with Heartland Express's debt use. 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. For instance, we've identified 2 warning signs for Heartland Express that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.