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

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. As with many other companies Landstar System, Inc. (NASDAQ:LSTR) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Landstar System

What Is Landstar System's Debt?

As you can see below, Landstar System had US$66.2m of debt at April 2023, down from US$166.2m a year prior. However, its balance sheet shows it holds US$388.2m in cash, so it actually has US$322.0m net cash.

How Healthy Is Landstar System's Balance Sheet?

According to the last reported balance sheet, Landstar System had liabilities of US$741.3m due within 12 months, and liabilities of US$160.9m due beyond 12 months. Offsetting these obligations, it had cash of US$388.2m as well as receivables valued at US$953.1m due within 12 months. So it can boast US$439.0m 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. Succinctly put, Landstar System boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Landstar System's EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Landstar System 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, 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 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Landstar System has net cash of US$322.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$638m, being 76% of its EBIT. So we don't think Landstar System's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Landstar System is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.