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 Sypris Solutions, Inc. (NASDAQ:SYPR) 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 and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Sypris Solutions Carry?
You can click the graphic below for the historical numbers, but it shows that as of April 2021 Sypris Solutions had US$10.3m of debt, an increase on US$6.47m, over one year. However, because it has a cash reserve of US$9.37m, its net debt is less, at about US$969.0k.
How Healthy Is Sypris Solutions' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Sypris Solutions had liabilities of US$27.5m due within 12 months and liabilities of US$21.6m due beyond that. Offsetting these obligations, it had cash of US$9.37m as well as receivables valued at US$9.40m due within 12 months. So it has liabilities totalling US$30.3m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Sypris Solutions has a market capitalization of US$79.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Carrying virtually no net debt, Sypris Solutions has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sypris Solutions's earnings that will influence how the balance sheet holds up in the future. 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.
In the last year Sypris Solutions had a loss before interest and tax, and actually shrunk its revenue by 12%, to US$80m. That's not what we would hope to see.
While Sypris Solutions's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$1.8m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of US$145k and the profit of US$343k. So one might argue that there's still a chance it can get things on the right track. 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. We've identified 4 warning signs with Sypris Solutions (at least 1 which is significant) , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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