Is Landstar System (NASDAQ:LSTR) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Our analysis indicates that LSTR is potentially undervalued!

What Is Landstar System's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Landstar System had debt of US$97.7m, up from US$89.0m in one year. However, its balance sheet shows it holds US$228.4m in cash, so it actually has US$130.7m net cash.

How Strong Is Landstar System's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Landstar System had liabilities of US$941.5m due within 12 months and liabilities of US$173.8m due beyond that. On the other hand, it had cash of US$228.4m and US$1.22b worth of receivables due within a year. So it can boast US$334.0m 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.

Also positive, Landstar System grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. 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. 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 most recent three years, Landstar System recorded free cash flow worth 69% 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$130.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 30% year-on-year EBIT growth. So is Landstar System's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Landstar System you should be aware of, and 1 of them makes us a bit uncomfortable.

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.

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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.