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. As with many other companies Sypris Solutions, Inc. (NASDAQ:SYPR) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Sypris Solutions’s Net Debt?
The chart below, which you can click on for greater detail, shows that Sypris Solutions had US$6.47m in debt in April 2020; about the same as the year before. However, because it has a cash reserve of US$5.21m, its net debt is less, at about US$1.26m.
A Look At Sypris Solutions’s Liabilities
Zooming in on the latest balance sheet data, we can see that Sypris Solutions had liabilities of US$26.3m due within 12 months and liabilities of US$19.6m due beyond that. On the other hand, it had cash of US$5.21m and US$9.86m worth of receivables due within a year. So it has liabilities totalling US$30.9m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the US$15.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Sypris Solutions would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can’t view debt in total isolation; since Sypris Solutions will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Sypris Solutions reported revenue of US$91m, which is a gain of 3.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, Sypris Solutions had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable US$1.9m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$1.5m over the last twelve months. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. To that end, you should be aware of the 2 warning signs we’ve spotted with Sypris Solutions .
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. 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. Thank you for reading.