Universal Stainless & Alloy Products (NASDAQ:USAP) Is Carrying A Fair Bit 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, Universal Stainless & Alloy Products, Inc. (NASDAQ:USAP) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Universal Stainless & Alloy Products

How Much Debt Does Universal Stainless & Alloy Products Carry?

As you can see below, Universal Stainless & Alloy Products had US$49.1m of debt at December 2020, down from US$63.3m a year prior. Net debt is about the same, since the it doesn't have much cash.

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

According to the last reported balance sheet, Universal Stainless & Alloy Products had liabilities of US$33.9m due within 12 months, and liabilities of US$43.5m due beyond 12 months. On the other hand, it had cash of US$164.0k and US$18.1m worth of receivables due within a year. So it has liabilities totalling US$59.1m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$90.6m. 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 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$180m, which is a fall of 26%. To be frank that doesn't bode well.

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). Indeed, it lost a very considerable US$9.2m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$19m into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Universal Stainless & Alloy Products that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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