Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. 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?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.
See our latest analysis for Old Dominion Freight Line
The chart below, which you can click on for greater detail, shows that Old Dominion Freight Line had US$100.0m in debt in June 2022; about the same as the year before. However, it does have US$420.5m in cash offsetting this, leading to net cash of US$320.6m.
Zooming in on the latest balance sheet data, we can see that Old Dominion Freight Line had liabilities of US$628.2m due within 12 months and liabilities of US$609.9m due beyond that. Offsetting this, it had US$420.5m in cash and US$701.4m in receivables that were due within 12 months. So it has liabilities totalling US$116.1m 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$27.8b 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!
In addition to that, we're happy to report that Old Dominion Freight Line has boosted its EBIT by 44%, 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.
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. Over the most recent three years, Old Dominion Freight Line recorded free cash flow worth 59% 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.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Old Dominion Freight Line has US$320.6m in net cash. And we liked the look of last year's 44% year-on-year EBIT growth. So we don't think Old Dominion Freight Line's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Old Dominion Freight Line .
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.
Find out whether Old Dominion Freight Line is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
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Old Dominion Freight Line, Inc. operates as a less-than-truckload (LTL) motor carrier in the United States and North America.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet with solid track record.
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.
Old Dominion Freight Line, Inc. operates as a less-than-truckload (LTL) motor carrier in the United States and North America.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet with solid track record.
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