U.S. Energy (NASDAQ:USEG) Is Making Moderate Use 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 U.S. Energy Corp. (NASDAQ:USEG) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for U.S. Energy

How Much Debt Does U.S. Energy Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 U.S. Energy had US$4.38m of debt, an increase on US$176.0k, over one year. However, because it has a cash reserve of US$2.62m, its net debt is less, at about US$1.76m.

A Look At U.S. Energy's Liabilities

The latest balance sheet data shows that U.S. Energy had liabilities of US$16.1m due within a year, and liabilities of US$16.6m falling due after that. On the other hand, it had cash of US$2.62m and US$6.13m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$23.9m.

While this might seem like a lot, it is not so bad since U.S. Energy has a market capitalization of US$68.0m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, U.S. Energy reported revenue of US$24m, which is a gain of 544%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

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$6.4m 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$2.4m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example U.S. Energy has 5 warning signs (and 4 which can't be ignored) we think 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.