Does ArcBest (NASDAQ: ARCB) have a healthy track record?
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it seems like smart money knows that debt – which is usually linked to bankruptcies – is a very important factor when you assess the risk of a business. We notice that ArcBest Corporation (NASDAQ: ARCB) has debt on its balance sheet. But does this debt worry shareholders?
When is debt dangerous?
Debt helps a business until it struggles to pay it off, either with new capital or with free 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 issue shares at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially large cap companies. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
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What is ArcBest’s net debt?
As you can see below, ArcBest had $ 268.0 million in debt in March 2021, up from $ 535.8 million the year before. However, his balance sheet shows that he holds US $ 360.9 million in cash, so he actually has US $ 92.8 million in net cash.
How healthy is ArcBest’s balance sheet?
Zooming in on the latest balance sheet data, we can see that ArcBest had liabilities of $ 500.7 million due within 12 months and liabilities of $ 415.4 million due beyond. In return, he had US $ 360.9 million in cash and US $ 358.0 million in receivables due within 12 months. Its liabilities therefore exceed the sum of its cash and (short-term) receivables by US $ 197.2 million.
Given that ArcBest has a market capitalization of US $ 1.98 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.
In addition, ArcBest has increased its EBIT by 48% over the past twelve months, and this growth will make it easier to manage its debt. 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, while the tax authorities love accounting profits, lenders only accept cash. While ArcBest has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erodes) that cash balance. . Fortunately for all shareholders, ArcBest has actually produced more free cash flow than EBIT over the past three years. There is nothing better than receiving cash to stay in the good favor of your lenders.
While it always makes sense to look at the total liabilities of a business, it is very reassuring that ArcBest has $ 92.8 million in net cash. And he impressed us with free cash flow of US $ 143 million, or 130% of his EBIT. So is ArcBest’s debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every company has them, and we’ve spotted 2 warning signs for ArcBest you should know.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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