Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Old Dominion Freight Line, Inc. (NASDAQ:ODFL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. 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.

What Is Old Dominion Freight Line's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Old Dominion Freight Line had US$60.0m of debt in September 2024, down from US$80.0m, one year before. However, its balance sheet shows it holds US$74.2m in cash, so it actually has US$14.2m net cash.

How Strong Is Old Dominion Freight Line's Balance Sheet?

The latest balance sheet data shows that Old Dominion Freight Line had liabilities of US$553.6m due within a year, and liabilities of US$696.5m falling due after that. Offsetting these obligations, it had cash of US$74.2m as well as receivables valued at US$576.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$599.2m.

This state of affairs indicates that Old Dominion Freight Line's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$43.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Old Dominion Freight Line also has more cash than debt, so we're pretty confident it can manage its debt safely.

Old Dominion Freight Line's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Old Dominion Freight Line 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Old Dominion Freight Line 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 most recent three years, Old Dominion Freight Line recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Old Dominion Freight Line has US$14.2m in net cash. So we are not troubled with Old Dominion Freight Line's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Old Dominion Freight Line is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.