Xcel Brands (NASDAQ:XELB) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Xcel Brands

What Is Xcel Brands's Debt?

The image below, which you can click on for greater detail, shows that Xcel Brands had debt of US$16.7m at the end of March 2021, a reduction from US$18.8m over a year. On the flip side, it has US$2.97m in cash leading to net debt of about US$13.7m.

A Look At Xcel Brands' Liabilities

According to the last reported balance sheet, Xcel Brands had liabilities of US$11.6m due within 12 months, and liabilities of US$26.4m due beyond 12 months. Offsetting these obligations, it had cash of US$2.97m as well as receivables valued at US$8.65m due within 12 months. So its liabilities total US$26.4m more than the combination of its cash and short-term receivables.

Xcel Brands has a market capitalization of US$57.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. 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 32%, to US$28m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Xcel Brands'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$6.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$15m. So to be blunt we do think it is 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. Be aware that Xcel Brands is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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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This article by Simply Wall St is general in nature. 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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