These 4 Measures Indicate That Old Dominion Freight Line (NASDAQ:ODFL) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Old Dominion Freight Line, Inc. (NASDAQ:ODFL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, 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$99.9m of debt at June 2021, down from US$144.9m a year prior. However, it does have US$649.5m in cash offsetting this, leading to net cash of US$549.5m.

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$482.0m falling due within a year, and liabilities of US$650.1m due beyond that. On the other hand, it had cash of US$649.5m and US$505.7m worth of receivables due within a year. So it actually has US$23.1m more liquid assets than total liabilities.

This state of affairs indicates that Old Dominion Freight Line's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$33.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Old Dominion Freight Line has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Old Dominion Freight Line has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Old Dominion Freight Line's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Old Dominion Freight Line 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, Old Dominion Freight Line recorded free cash flow worth 68% 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 it is always sensible to investigate a company's debt, in this case Old Dominion Freight Line has US$549.5m in net cash and a decent-looking balance sheet. And we liked the look of last year's 47% year-on-year EBIT growth. So is Old Dominion Freight Line's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Old Dominion Freight Line is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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