Is Old Dominion Freight Line (NASDAQ:ODFL) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Old Dominion Freight Line, Inc. (NASDAQ:ODFL) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Old Dominion Freight Line

What Is Old Dominion Freight Line's Debt?

As you can see below, Old Dominion Freight Line had US$100.0m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$232.4m in cash, so it actually has US$132.5m net cash.

How Strong Is Old Dominion Freight Line's Balance Sheet?

We can see from the most recent balance sheet that Old Dominion Freight Line had liabilities of US$569.5m falling due within a year, and liabilities of US$641.1m due beyond that. On the other hand, it had cash of US$232.4m and US$579.9m worth of receivables due within a year. So its liabilities total US$398.3m more than the combination of its cash and short-term receivables.

Having regard to Old Dominion Freight Line's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$41.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Old Dominion Freight Line boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Old Dominion Freight Line grew its EBIT by 19% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Old Dominion Freight Line 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 company can only pay off debt with cold hard cash, not accounting profits. Old Dominion Freight Line 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. During the last three years, Old Dominion Freight Line produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Old Dominion Freight Line's liabilities, but we can be reassured by the fact it has has net cash of US$132.5m. And we liked the look of last year's 19% year-on-year EBIT growth. So is Old Dominion Freight Line's debt a risk? It doesn't seem so to us. We'd be very excited to see if Old Dominion Freight Line insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.