Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Universal Stainless Steel and Alloy Products, Inc. (NASDAQ: USAP) uses debt. But the real question is whether this debt makes the business risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business 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 flow and debt together.

See our latest review for universal stainless steel and alloy products

What is the debt of Universal Stainless & Alloy Products?

You can click on the graph below for historical numbers, but it shows that Universal Stainless & Alloy Products had $ 52.0 million in debt in June 2021, up from $ 71.3 million a year earlier. And he doesn’t have a lot of cash, so his net debt is about the same.

A look at the responsibilities of universal stainless steel and alloy products

Zooming in on the latest balance sheet data, we can see that Universal Stainless & Alloy Products had liabilities of US $ 33.1 million due within 12 months and liabilities of US $ 57.9 million due beyond. . In return, he had $ 158.0,000 in cash and $ 21.3 million in receivables due within 12 months. Its liabilities therefore total US $ 69.6 million more than the combination of its cash and short-term receivables.

This is a mountain of leverage compared to its market cap of US $ 81.8 million. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is the earnings of Universal Stainless & Alloy Products that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Over the past year, Universal Stainless & Alloy Products recorded a loss before interest and taxes and in fact reduced its revenue by 35% to US $ 144 million. It makes us nervous, to say the least.

Emptor Warning

Not only has Universal Stainless & Alloy Products’ revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Its EBIT loss was US $ 13 million. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. Quite frankly, we believe the record is far from up to par, although it could improve over time. We’d be better off if he turned his US $ 21 million year-over-year loss into profit. In the meantime, we consider the title to be very risky. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 3 warning signs with universal stainless steel and alloy products (at least 1 which is potentially serious), and understanding them should be part of your investment process.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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