Here's Why Landstar System (NASDAQ:LSTR) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Landstar System, Inc. (NASDAQ:LSTR) does use debt in its business. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Landstar System Carry?

As you can see below, at the end of March 2025, Landstar System had US$59.4m of debt, up from US$51.7m a year ago. Click the image for more detail. However, it does have US$473.4m in cash offsetting this, leading to net cash of US$414.1m.

How Healthy Is Landstar System's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Landstar System had liabilities of US$612.3m due within 12 months and liabilities of US$173.1m due beyond that. Offsetting this, it had US$473.4m in cash and US$751.6m in receivables that were due within 12 months. So it actually has US$439.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Landstar System could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Landstar System has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Landstar System

The modesty of its debt load may become crucial for Landstar System if management cannot prevent a repeat of the 25% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Landstar System'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Landstar System 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, Landstar System actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Landstar System has US$414.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in US$224m. So we don't have any problem with Landstar System's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Landstar System insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.