We Think U.S. Energy (NASDAQ:USEG) Has A Fair Chunk Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, U.S. Energy Corp. (NASDAQ:USEG) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for U.S. Energy

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

As you can see below, at the end of September 2022, U.S. Energy had US$12.7m of debt, up from US$101.0k a year ago. Click the image for more detail. On the flip side, it has US$3.20m in cash leading to net debt of about US$9.52m.

How Strong Is U.S. Energy's Balance Sheet?

We can see from the most recent balance sheet that U.S. Energy had liabilities of US$13.2m falling due within a year, and liabilities of US$25.4m due beyond that. Offsetting this, it had US$3.20m in cash and US$4.52m in receivables that were due within 12 months. So it has liabilities totalling US$31.0m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$46.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year U.S. Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 566%, to US$34m. That's virtually the hole-in-one of revenue growth!

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$2.1m 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$10m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should learn about the 4 warning signs we've spotted with U.S. Energy (including 1 which doesn't sit too well with us) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.