Health Check: How Prudently Does Delek US Holdings (NYSE:DK) Use Debt?

Warren Buffett famously said, '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 Delek US Holdings, Inc. (NYSE:DK) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for Delek US Holdings

How Much Debt Does Delek US Holdings Carry?

The chart below, which you can click on for greater detail, shows that Delek US Holdings had US$2.56b in debt in September 2021; about the same as the year before. However, it does have US$830.6m in cash offsetting this, leading to net debt of about US$1.73b.

How Strong Is Delek US Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Delek US Holdings had liabilities of US$2.78b due within 12 months and liabilities of US$3.01b due beyond that. Offsetting these obligations, it had cash of US$830.6m as well as receivables valued at US$1.01b due within 12 months. So its liabilities total US$3.95b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$1.39b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Delek US Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Delek US Holdings'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 Delek US Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$9.4b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Delek US Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable US$285m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost US$455m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Delek US Holdings you should know about.

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.