Is Landstar System (NASDAQ:LSTR) A Risky Investment?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Landstar System, Inc. (NASDAQ:LSTR) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Landstar System
What Is Landstar System's Net Debt?
As you can see below, Landstar System had US$53.9m of debt, at December 2019, which is about the same as the year before. You can click the chart for greater detail. But it also has US$352.4m in cash to offset that, meaning it has US$298.5m net cash.
How Healthy Is Landstar System's Balance Sheet?
The latest balance sheet data shows that Landstar System had liabilities of US$552.9m due within a year, and liabilities of US$153.3m falling due after that. On the other hand, it had cash of US$352.4m and US$624.1m worth of receivables due within a year. So it can boast US$270.3m more liquid assets than total liabilities.
This surplus suggests that Landstar System has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Landstar System boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Landstar System saw its EBIT drop by 9.9% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Landstar System'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Landstar System 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. During the last three years, Landstar System generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Landstar System has net cash of US$298.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$288m, being 80% of its EBIT. So we don't think Landstar System's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Landstar System has 1 warning sign we think you should be aware of.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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