Is Knight-Swift Transportation Holdings (NYSE:KNX) A Risky Investment?

By
Simply Wall St
Published
December 28, 2021
NYSE:KNX
Source: Shutterstock

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Knight-Swift Transportation Holdings Inc. (NYSE:KNX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. 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.

Check out our latest analysis for Knight-Swift Transportation Holdings

How Much Debt Does Knight-Swift Transportation Holdings Carry?

The image below, which you can click on for greater detail, shows that at September 2021 Knight-Swift Transportation Holdings had debt of US$1.83b, up from US$736.9m in one year. On the flip side, it has US$269.7m in cash leading to net debt of about US$1.56b.

debt-equity-history-analysis
NYSE:KNX Debt to Equity History December 28th 2021

How Healthy Is Knight-Swift Transportation Holdings' Balance Sheet?

The latest balance sheet data shows that Knight-Swift Transportation Holdings had liabilities of US$852.5m due within a year, and liabilities of US$3.20b falling due after that. Offsetting this, it had US$269.7m in cash and US$937.9m in receivables that were due within 12 months. So its liabilities total US$2.84b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Knight-Swift Transportation Holdings has a huge market capitalization of US$10.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Knight-Swift Transportation Holdings has a low net debt to EBITDA ratio of only 1.2. And its EBIT easily covers its interest expense, being 46.4 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Knight-Swift Transportation Holdings grew its EBIT by 60% over the last twelve months, and that growth will make it easier to handle its debt. 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 Knight-Swift Transportation Holdings 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, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, Knight-Swift Transportation Holdings's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Happily, Knight-Swift Transportation Holdings's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its EBIT growth rate also supports that impression! When we consider the range of factors above, it looks like Knight-Swift Transportation Holdings is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. 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 1 warning sign for Knight-Swift Transportation Holdings you should be aware of.

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.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.