Sypris Solutions (NASDAQ:SYPR) Is Carrying A Fair Bit Of Debt

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 is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See 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 as of October 2020 Sypris Solutions had US$10.0m of debt, an increase on US$6.46m, over one year. However, it does have US$8.29m in cash offsetting this, leading to net debt of about US$1.74m.

A Look At Sypris Solutions' Liabilities

We can see from the most recent balance sheet that Sypris Solutions had liabilities of US$26.8m falling due within a year, and liabilities of US$19.4m due beyond that. Offsetting these obligations, it had cash of US$8.29m as well as receivables valued at US$10.3m due within 12 months. So its liabilities total US$27.5m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Sypris Solutions has a market capitalization of US$51.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. 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 7.5%, to US$83m. We would much prefer see growth.

Caveat Emptor

Importantly, Sypris Solutions had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$1.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$4.2m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with Sypris Solutions (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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.

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