Here's Why Sypris Solutions (NASDAQ:SYPR) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Sypris Solutions, Inc. (NASDAQ:SYPR) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sypris Solutions

How Much Debt Does Sypris Solutions Carry?

As you can see below, Sypris Solutions had US$7.72m of debt, at October 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$16.5m in cash offsetting this, leading to net cash of US$8.75m.

How Healthy Is Sypris Solutions' Balance Sheet?

The latest balance sheet data shows that Sypris Solutions had liabilities of US$41.7m due within a year, and liabilities of US$32.9m falling due after that. Offsetting these obligations, it had cash of US$16.5m as well as receivables valued at US$10.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$47.4m.

Given this deficit is actually higher than the company's market capitalization of US$46.3m, we think shareholders really should watch Sypris Solutions's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Given that Sypris Solutions has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Notably, Sypris Solutions's EBIT launched higher than Elon Musk, gaining a whopping 246% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sypris Solutions will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sypris Solutions 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. Happily for any shareholders, Sypris Solutions actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Sypris Solutions's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$8.75m. And it impressed us with free cash flow of US$6.6m, being 6,591% of its EBIT. So we are not troubled with Sypris Solutions'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. For example, we've discovered 1 warning sign for Sypris Solutions that you should be aware of before investing here.

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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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.