Stock Analysis

Is Universal Logistics Holdings (NASDAQ:ULH) A Risky Investment?

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NasdaqGS:ULH
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Universal Logistics Holdings, Inc. (NASDAQ:ULH) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Universal Logistics Holdings

What Is Universal Logistics Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of October 2020 Universal Logistics Holdings had US$466.6m of debt, an increase on US$386.6m, over one year. However, it also had US$15.4m in cash, and so its net debt is US$451.2m.

debt-equity-history-analysis
NasdaqGS:ULH Debt to Equity History January 13th 2021

How Strong Is Universal Logistics Holdings' Balance Sheet?

According to the last reported balance sheet, Universal Logistics Holdings had liabilities of US$273.3m due within 12 months, and liabilities of US$555.9m due beyond 12 months. On the other hand, it had cash of US$15.4m and US$274.7m worth of receivables due within a year. So its liabilities total US$539.2m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$579.3m, so it does suggest shareholders should keep an eye on Universal Logistics Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Universal Logistics Holdings's debt is 3.1 times its EBITDA, and its EBIT cover its interest expense 4.5 times over. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Shareholders should be aware that Universal Logistics Holdings's EBIT was down 33% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Logistics Holdings'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Universal Logistics Holdings recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

We'd go so far as to say Universal Logistics Holdings's EBIT growth rate was disappointing. But at least its interest cover is not so bad. Overall, it seems to us that Universal Logistics Holdings's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Universal Logistics Holdings you should know about.

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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What are the risks and opportunities for Universal Logistics Holdings?

Universal Logistics Holdings, Inc. provides transportation and logistics solutions in the United States, Mexico, Canada, and Colombia.

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Rewards

  • Price-To-Earnings ratio (6.8x) is below the US market (15.5x)

  • Earnings are forecast to grow 2.1% per year

  • Earnings grew by 105.2% over the past year

Risks

  • Has a high level of debt

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Universal Logistics Holdings

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