Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Universal Stainless & Alloy Products, Inc. (NASDAQ:USAP) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Universal Stainless & Alloy Products's Debt?
You can click the graphic below for the historical numbers, but it shows that Universal Stainless & Alloy Products had US$50.6m of debt in March 2021, down from US$75.4m, one year before. Net debt is about the same, since the it doesn't have much cash.NasdaqGS:USAP Debt to Equity History July 22nd 2021
A Look At Universal Stainless & Alloy Products' Liabilities
According to the last reported balance sheet, Universal Stainless & Alloy Products had liabilities of US$25.0m due within 12 months, and liabilities of US$58.2m due beyond 12 months. Offsetting this, it had US$423.0k in cash and US$20.7m in receivables that were due within 12 months. So its liabilities total US$62.1m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of US$101.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Universal Stainless & Alloy Products'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 report on analyst profit forecasts to be interesting.
Over 12 months, Universal Stainless & Alloy Products made a loss at the EBIT level, and saw its revenue drop to US$158m, which is a fall of 34%. To be frank that doesn't bode well.
While Universal Stainless & Alloy Products's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$14m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$22m into a profit. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Universal Stainless & Alloy Products 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.
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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In This StoryUSAP
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