Is U.S. Energy (NASDAQ:USEG) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that U.S. Energy Corp. (NASDAQ:USEG) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for U.S. Energy

What Is U.S. Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 U.S. Energy had US$12.0m of debt, an increase on US$4.38m, over one year. However, because it has a cash reserve of US$1.27m, its net debt is less, at about US$10.7m.

A Look At U.S. Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that U.S. Energy had liabilities of US$9.92m due within 12 months and liabilities of US$28.5m due beyond that. Offsetting these obligations, it had cash of US$1.27m as well as receivables valued at US$3.10m due within 12 months. So it has liabilities totalling US$34.1m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$39.3m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine U.S. Energy's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year U.S. Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 47%, to US$36m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, U.S. Energy still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$67k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$7.6m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - U.S. Energy has 4 warning signs we think you should be aware of.

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.