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Does ArcBest (NASDAQ:ARCB) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that ArcBest Corporation (NASDAQ:ARCB) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for ArcBest

What Is ArcBest's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 ArcBest had US$534.8m of debt, an increase on US$282.6m, over one year. However, its balance sheet shows it holds US$574.0m in cash, so it actually has US$39.2m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is ArcBest's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ArcBest had liabilities of US$439.7m due within 12 months and liabilities of US$656.0m due beyond that. On the other hand, it had cash of US$574.0m and US$289.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$231.7m.

ArcBest has a market capitalization of US$766.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, ArcBest also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact ArcBest's saving grace is its low debt levels, because its EBIT has tanked 45% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ArcBest 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. Over the last three years, ArcBest actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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$39.2m. The cherry on top was that in converted 146% of that EBIT to free cash flow, bringing in US$94m. So we are not troubled with ArcBest's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 4 warning signs for ArcBest you should know about.

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.

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. 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.

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