Stock Analysis

Universal Logistics Holdings (NASDAQ:ULH) Seems To Use Debt Quite Sensibly

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NasdaqGS:ULH
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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Universal Logistics Holdings, Inc. (NASDAQ:ULH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Universal Logistics Holdings

How Much Debt Does Universal Logistics Holdings Carry?

The image below, which you can click on for greater detail, shows that Universal Logistics Holdings had debt of US$427.3m at the end of December 2021, a reduction from US$460.1m over a year. However, because it has a cash reserve of US$22.0m, its net debt is less, at about US$405.4m.

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NasdaqGS:ULH Debt to Equity History March 15th 2022

How Healthy Is Universal Logistics Holdings' Balance Sheet?

The latest balance sheet data shows that Universal Logistics Holdings had liabilities of US$251.6m due within a year, and liabilities of US$583.7m falling due after that. On the other hand, it had cash of US$22.0m and US$341.4m worth of receivables due within a year. So its liabilities total US$471.9m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$575.3m, 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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Universal Logistics Holdings's net debt of 2.4 times EBITDA suggests graceful use of debt. And the fact that its trailing twelve months of EBIT was 8.9 times its interest expenses harmonizes with that theme. Also relevant is that Universal Logistics Holdings has grown its EBIT by a very respectable 28% in the last year, thus enhancing its ability to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Universal Logistics Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, Universal Logistics Holdings's free cash flow amounted to 31% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

On our analysis Universal Logistics Holdings's EBIT growth rate should signal that it won't have too much trouble with its debt. But the other factors we noted above weren't so encouraging. For instance it seems like it has to struggle a bit to handle its total liabilities. When we consider all the factors mentioned above, we do feel a bit cautious about Universal Logistics Holdings's use of debt. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. 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. For instance, we've identified 2 warning signs for Universal Logistics Holdings (1 is a bit unpleasant) you should be aware of.

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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