Is Xcel Brands (NASDAQ:XELB) A Risky Investment?

Warren Buffett famously said, '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. As with many other companies Xcel Brands, Inc. (NASDAQ:XELB) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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

What Is Xcel Brands's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Xcel Brands had US$4.52m of debt, an increase on none, over one year. However, it does have US$924.0k in cash offsetting this, leading to net debt of about US$3.60m.

How Healthy Is Xcel Brands' Balance Sheet?

According to the last reported balance sheet, Xcel Brands had liabilities of US$6.07m due within 12 months, and liabilities of US$13.0m due beyond 12 months. Offsetting this, it had US$924.0k in cash and US$3.06m in receivables that were due within 12 months. So it has liabilities totalling US$15.1m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$18.6m, so it does suggest shareholders should keep an eye on Xcel Brands' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Xcel Brands 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.

In the last year Xcel Brands had a loss before interest and tax, and actually shrunk its revenue by 53%, to US$10m. That makes us nervous, to say the least.

Caveat Emptor

While Xcel Brands's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$15m 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. However, it doesn't help that it burned through US$8.1m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should be aware of the 4 warning signs we've spotted with Xcel Brands .

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.