Stock Analysis

Is Sypris Solutions (NASDAQ:SYPR) A Risky Investment?

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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. Importantly, Sypris Solutions, Inc. (NASDAQ:SYPR) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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.

View our latest analysis for Sypris Solutions

What Is Sypris Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that Sypris Solutions had US$7.69m of debt in December 2021, down from US$10.0m, one year before. However, it does have US$11.6m in cash offsetting this, leading to net cash of US$3.93m.

NasdaqGM:SYPR Debt to Equity History May 12th 2022

A Look At Sypris Solutions' Liabilities

According to the last reported balance sheet, Sypris Solutions had liabilities of US$34.0m due within 12 months, and liabilities of US$26.2m due beyond 12 months. Offsetting these obligations, it had cash of US$11.6m as well as receivables valued at US$10.4m due within 12 months. So its liabilities total US$38.2m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$43.8m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Sypris Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Sypris Solutions improved its EBIT from a last year's loss to a positive US$1.3m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sypris Solutions's earnings that will influence how the balance sheet holds up in the future. 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. Over the last year, Sypris Solutions actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Sypris Solutions does have more liabilities than liquid assets, it also has net cash of US$3.93m. And it impressed us with free cash flow of US$1.4m, being 109% of its EBIT. So we don't have any problem with Sypris Solutions's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Sypris Solutions that you should be aware of before investing here.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Sypris Solutions is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.