Health Check: How Prudently Does Xcel Brands (NASDAQ:XELB) Use 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.' 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. We note that Xcel Brands, Inc. (NASDAQ:XELB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Xcel Brands

How Much Debt Does Xcel Brands Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Xcel Brands had debt of US$24.8m, up from US$18.1m in one year. However, it also had US$4.82m in cash, and so its net debt is US$20.0m.

How Strong Is Xcel Brands' Balance Sheet?

According to the last reported balance sheet, Xcel Brands had liabilities of US$13.4m due within 12 months, and liabilities of US$38.4m due beyond 12 months. On the other hand, it had cash of US$4.82m and US$10.7m worth of receivables due within a year. So its liabilities total US$36.4m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's US$27.6m market capitalization, you might well be inclined to review the balance sheet intently. 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Xcel Brands will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Xcel Brands had a loss before interest and tax, and actually shrunk its revenue by 9.3%, to US$33m. That's not what we would hope to see.

Caveat Emptor

Importantly, Xcel Brands had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$6.2m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$7.5m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Xcel Brands (of which 2 are potentially serious!) 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.

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.

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