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

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 can see that Landstar System, Inc. (NASDAQ:LSTR) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View 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 Landstar System had US$51.7m of debt in March 2024, down from US$66.2m, one year before. However, it does have US$530.5m in cash offsetting this, leading to net cash of US$478.8m.

How Strong Is Landstar System's Balance Sheet?

The latest balance sheet data shows that Landstar System had liabilities of US$589.7m due within a year, and liabilities of US$138.3m falling due after that. Offsetting this, it had US$530.5m in cash and US$764.4m in receivables that were due within 12 months. So it can boast US$566.9m 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.

It is just as well that Landstar System's load is not too heavy, because its EBIT was down 41% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Landstar System has net cash of US$478.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$320m, being 90% of its EBIT. So we don't have any problem with Landstar System's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Landstar System that you should be aware of before investing here.

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.

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