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.' 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. We note that U.S. Xpress Enterprises, Inc. (NYSE:USX) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is U.S. Xpress Enterprises's Net Debt?
The image below, which you can click on for greater detail, shows that U.S. Xpress Enterprises had debt of US$386.1m at the end of September 2020, a reduction from US$422.0m over a year. Net debt is about the same, since the it doesn't have much cash.
How Strong Is U.S. Xpress Enterprises's Balance Sheet?
We can see from the most recent balance sheet that U.S. Xpress Enterprises had liabilities of US$354.4m falling due within a year, and liabilities of US$584.4m due beyond that. Offsetting these obligations, it had cash of US$7.42m as well as receivables valued at US$207.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$724.4m.
The deficiency here weighs heavily on the US$356.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, U.S. Xpress Enterprises would probably need a major re-capitalization if its creditors were to demand repayment.
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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
While we wouldn't worry about U.S. Xpress Enterprises's net debt to EBITDA ratio of 3.3, we think its super-low interest cover of 1.5 times is a sign of high leverage. In large part that's due to the company's significant depreciation and amortisation charges, which arguably mean its EBITDA is a very generous measure of earnings, and its debt may be more of a burden than it first appears. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. Worse, U.S. Xpress Enterprises's EBIT was down 47% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. 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 U.S. Xpress Enterprises can strengthen its balance sheet over time. 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 the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, U.S. Xpress Enterprises burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
On the face of it, U.S. Xpress Enterprises's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. And even its interest cover fails to inspire much confidence. Considering everything we've mentioned above, it's fair to say that U.S. Xpress Enterprises is carrying heavy debt load. If you play with fire you risk getting burnt, so we'd probably give this stock a wide berth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for U.S. Xpress Enterprises you should be aware of, and 1 of them makes us a bit uncomfortable.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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