Stock Analysis

Is Landstar System (NASDAQ:LSTR) A Risky Investment?

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NasdaqGS:LSTR
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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 note that Landstar System, Inc. (NASDAQ:LSTR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Landstar System

How Much Debt Does Landstar System Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Landstar System had US$113.6m of debt, an increase on US$70.6m, over one year. However, its balance sheet shows it holds US$119.8m in cash, so it actually has US$6.17m net cash.

debt-equity-history-analysis
NasdaqGS:LSTR Debt to Equity History August 11th 2022

How Strong Is Landstar System's Balance Sheet?

We can see from the most recent balance sheet that Landstar System had liabilities of US$977.9m falling due within a year, and liabilities of US$182.3m due beyond that. Offsetting this, it had US$119.8m in cash and US$1.33b in receivables that were due within 12 months. So it actually has US$290.9m more liquid assets than total liabilities.

This surplus suggests that Landstar System has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Landstar System has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Landstar System grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Landstar System 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. Over the most recent three years, Landstar System recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Landstar System has net cash of US$6.17m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 46% over the last year. So is Landstar System's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Landstar System .

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.

Valuation is complex, but we're helping make it simple.

Find out whether Landstar System is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NasdaqGS:LSTR

Landstar System

Landstar System, Inc. provides integrated transportation management solutions in the United States, Canada, Mexico, and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation0
Future Growth1
Past Performance5
Financial Health5
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Excellent balance sheet with solid track record.