Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Landstar System, Inc. (NASDAQ:LSTR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Landstar System's Net Debt?

As you can see below, Landstar System had US$58.4m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$504.0m in cash offsetting this, leading to net cash of US$445.7m.

How Strong Is Landstar System's Balance Sheet?

We can see from the most recent balance sheet that Landstar System had liabilities of US$605.7m falling due within a year, and liabilities of US$148.7m due beyond that. Offsetting this, it had US$504.0m in cash and US$766.6m in receivables that were due within 12 months. So it actually has US$516.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Landstar System could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Landstar System has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Landstar System's load is not too heavy, because its EBIT was down 37% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Landstar System 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. Over the last three years, Landstar System recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually 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$445.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$314m, being 93% of its EBIT. So we are not troubled with Landstar System's debt use. We'd be motivated to research the stock further if we found out that Landstar System insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.