Is Universal Stainless & Alloy Products (NASDAQ:USAP) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Universal Stainless & Alloy Products, Inc. (NASDAQ:USAP) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Universal Stainless & Alloy Products

What Is Universal Stainless & Alloy Products's Debt?

The image below, which you can click on for greater detail, shows that Universal Stainless & Alloy Products had debt of US$59.5m at the end of September 2020, a reduction from US$64.9m over a year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Universal Stainless & Alloy Products's Balance Sheet?

We can see from the most recent balance sheet that Universal Stainless & Alloy Products had liabilities of US$34.0m falling due within a year, and liabilities of US$55.2m due beyond that. Offsetting this, it had US$58.0k in cash and US$26.5m in receivables that were due within 12 months. So its liabilities total US$62.8m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$63.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Universal Stainless & Alloy Products's ability to maintain a healthy balance sheet going forward. 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 made a loss at the EBIT level, and saw its revenue drop to US$204m, which is a fall of 17%. We would much prefer see growth.

Caveat Emptor

Not only did Universal Stainless & Alloy Products's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$12m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$12m. In the meantime, we consider the stock very 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Universal Stainless & Alloy Products 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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