ArcBest (NASDAQ: ARCB) could easily take on more debt
Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that ArcBest Corporation (NASDAQ: ARCB) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
What is ArcBest’s net debt?
As you can see below, ArcBest had a debt of US $ 238.7 million in June 2021, up from US $ 534.8 million the year before. But it also has $ 422.6 million in cash to make up for that, which means it has $ 183.9 million in net cash.
NasdaqGS: ARCB History of debt to equity September 26, 2021
How strong is ArcBest’s balance sheet?
According to the latest published balance sheet, ArcBest had a liability of US $ 560.3 million due within 12 months and a liability of US $ 383.1 million due beyond 12 months. In compensation for these obligations, it had cash of US $ 422.6 million as well as receivables valued at US $ 373.8 million due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 147.0 million.
Given that ArcBest has a market capitalization of US $ 1.95 billion, it is hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. While it has some liabilities to note, ArcBest also has more cash than debt, so we’re pretty confident it can handle its debt safely.
Even more impressive, ArcBest increased its EBIT by 156% over twelve months. If sustained, this growth will make debt even more manageable in the years to come. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine ArcBest’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 Analyst Profit Forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. ArcBest may have net cash on the balance sheet, but it is always interesting to consider the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its capacity. to manage debt. Fortunately for all shareholders, ArcBest has actually generated more free cash flow than EBIT over the past three years. There is nothing better than cash flow to stay in the good graces of your lenders.
While it’s always a good idea to look at a company’s total liabilities, it’s very reassuring that ArcBest has $ 183.9 million in net cash. The icing on the cake is that he converted 130% of that EBIT into free cash flow, bringing in US $ 200 million. We therefore do not believe that ArcBest’s use of debt is risky. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, ArcBest has 2 warning signs (and 1 which makes us a little uncomfortable) we think you should be aware of.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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