Is ArcBest (NASDAQ:ARCB) A Risky Investment?

Simply Wall St · 09/15/2023 12:55

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies ArcBest Corporation (NASDAQ:ARCB) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for ArcBest

How Much Debt Does ArcBest Carry?

As you can see below, ArcBest had US$233.0m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$340.4m in cash offsetting this, leading to net cash of US$107.4m.

debt-equity-history-analysis
NasdaqGS:ARCB Debt to Equity History September 15th 2023

A Look At ArcBest's Liabilities

According to the last reported balance sheet, ArcBest had liabilities of US$641.3m due within 12 months, and liabilities of US$561.5m due beyond 12 months. Offsetting these obligations, it had cash of US$340.4m as well as receivables valued at US$440.7m due within 12 months. So it has liabilities totalling US$421.6m more than its cash and near-term receivables, combined.

Given ArcBest has a market capitalization of US$2.43b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, ArcBest boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for ArcBest if management cannot prevent a repeat of the 43% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ArcBest can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. ArcBest 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. During the last three years, ArcBest generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although ArcBest's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$107.4m. And it impressed us with free cash flow of US$193m, being 82% of its EBIT. So we don't have any problem with ArcBest's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with ArcBest , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.