Does Universal Stainless & Alloy Products (NASDAQ:USAP) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Universal Stainless & Alloy Products, Inc. (NASDAQ:USAP) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Universal Stainless & Alloy Products

What Is Universal Stainless & Alloy Products's Debt?

As you can see below, at the end of March 2023, Universal Stainless & Alloy Products had US$95.5m of debt, up from US$78.0m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

A Look At Universal Stainless & Alloy Products' Liabilities

Zooming in on the latest balance sheet data, we can see that Universal Stainless & Alloy Products had liabilities of US$40.7m due within 12 months and liabilities of US$99.1m due beyond that. Offsetting these obligations, it had cash of US$1.51m as well as receivables valued at US$36.0m due within 12 months. So its liabilities total US$102.3m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$116.7m. 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 Universal Stainless & Alloy Products 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, Universal Stainless & Alloy Products reported revenue of US$220m, which is a gain of 32%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Universal Stainless & Alloy Products's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$4.5m 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. Another cause for caution is that is bled US$16m in negative free cash flow over the last twelve months. 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. To that end, you should learn about the 2 warning signs we've spotted with Universal Stainless & Alloy Products (including 1 which is significant) .

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.