Stock Analysis

These 4 Measures Indicate That Sypris Solutions (NASDAQ:SYPR) Is Using Debt Extensively

NasdaqGM:SYPR
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Sypris Solutions, Inc. (NASDAQ:SYPR) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sypris Solutions

What Is Sypris Solutions's Debt?

As you can see below, Sypris Solutions had US$7.53m of debt, at July 2022, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of US$7.49m, its net debt is less, at about US$40.0k.

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NasdaqGM:SYPR Debt to Equity History October 5th 2022

How Healthy Is Sypris Solutions' Balance Sheet?

The latest balance sheet data shows that Sypris Solutions had liabilities of US$38.9m due within a year, and liabilities of US$17.8m falling due after that. On the other hand, it had cash of US$7.49m and US$11.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$37.4m.

This deficit is considerable relative to its market capitalization of US$43.8m, so it does suggest shareholders should keep an eye on Sypris Solutions' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. But either way, Sypris Solutions has virtually no net debt, 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$2.7m. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, Sypris Solutions burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

We'd go so far as to say Sypris Solutions's conversion of EBIT to free cash flow was disappointing. But on the bright side, its net debt to EBITDA is a good sign, and makes us more optimistic. Overall, we think it's fair to say that Sypris Solutions has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the 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 instance, we've identified 3 warning signs for Sypris Solutions (1 shouldn't be ignored) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.