Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. Importantly, Old Dominion Freight Line, Inc. (NASDAQ:ODFL) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Old Dominion Freight Line
How Much Debt Does Old Dominion Freight Line Carry?
As you can see below, Old Dominion Freight Line had US$45.0m of debt, at September 2019, which is about the same the year before. You can click the chart for greater detail. But it also has US$322.3m in cash to offset that, meaning it has US$277.3m net cash.
How Strong Is Old Dominion Freight Line's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Old Dominion Freight Line had liabilities of US$396.9m due within 12 months and liabilities of US$586.0m due beyond that. On the other hand, it had cash of US$322.3m and US$438.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$222.5m.
Having regard to Old Dominion Freight Line's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$14.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Old Dominion Freight Line also has more cash than debt, so we're pretty confident it can manage its debt safely.
And we also note warmly that Old Dominion Freight Line grew its EBIT by 15% 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Looking at the most recent three years, Old Dominion Freight Line recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
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$277.3m. And it impressed us with its EBIT growth of 15% over the last year. So is Old Dominion Freight Line's debt a risk? It doesn't seem so to us. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Old Dominion Freight Line insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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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