Is U.S. Energy (NASDAQ:USEG) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies U.S. Energy Corp. (NASDAQ:USEG) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for U.S. Energy

What Is U.S. Energy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that U.S. Energy had US$12.0m of debt in September 2023, down from US$12.7m, one year before. On the flip side, it has US$2.14m in cash leading to net debt of about US$9.87m.

A Look At U.S. Energy's Liabilities

We can see from the most recent balance sheet that U.S. Energy had liabilities of US$12.1m falling due within a year, and liabilities of US$29.9m due beyond that. Offsetting these obligations, it had cash of US$2.14m as well as receivables valued at US$3.90m due within 12 months. So its liabilities total US$36.0m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's US$26.5m market capitalization, you might well be inclined to review the balance sheet intently. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if U.S. Energy can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, U.S. Energy made a loss at the EBIT level, and saw its revenue drop to US$33m, which is a fall of 2.1%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months U.S. Energy produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$13m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of US$14m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for U.S. Energy you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.