Is Universal Stainless & Alloy Products (NASDAQ:USAP) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Universal Stainless & Alloy Products, Inc. (NASDAQ:USAP) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Universal Stainless & Alloy Products

How Much Debt Does Universal Stainless & Alloy Products Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Universal Stainless & Alloy Products had US$91.8m of debt, an increase on US$68.5m, over one year. However, it also had US$2.02m in cash, and so its net debt is US$89.8m.

How Strong Is Universal Stainless & Alloy Products' Balance Sheet?

We can see from the most recent balance sheet that Universal Stainless & Alloy Products had liabilities of US$45.5m falling due within a year, and liabilities of US$98.1m due beyond that. On the other hand, it had cash of US$2.02m and US$31.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$110.6m.

Given this deficit is actually higher than the company's market capitalization of US$88.1m, we think shareholders really should watch Universal Stainless & Alloy Products's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Universal Stainless & Alloy Products reported revenue of US$202m, which is a gain of 30%, 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

Even though Universal Stainless & Alloy Products managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$7.0m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$21m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Universal Stainless & Alloy Products (of which 1 is concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.