We Think Old Dominion Freight Line (NASDAQ:ODFL) Can Stay On Top Of Its 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.' 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. Importantly, Old Dominion Freight Line, Inc. (NASDAQ:ODFL) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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$80.0m of debt at March 2024, down from US$100.0m a year prior. But on the other hand it also has US$581.0m in cash, leading to a US$501.0m net cash position.

How Healthy 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$550.7m falling due within a year, and liabilities of US$699.0m due beyond that. Offsetting these obligations, it had cash of US$581.0m as well as receivables valued at US$603.5m due within 12 months. So it has liabilities totalling US$65.2m more than its cash and near-term receivables, combined.

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$37.7b company is short on cash, but still worth keeping an eye on the 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.

On the other hand, Old Dominion Freight Line saw its EBIT drop by 9.6% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, Old Dominion Freight Line's free cash flow amounted to 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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$501.0m. So we don't have any problem with Old Dominion Freight Line's use of debt. We'd be motivated to research the stock further if we found out that Old Dominion Freight Line insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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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