Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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 the real question is whether this debt is making the company risky.

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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.

What Is U.S. Xpress Enterprises’s Debt?

As you can see below, U.S. Xpress Enterprises had US$328.1m of debt at June 2021, down from US$379.7m a year prior. Net debt is about the same, since the it doesn’t have much cash.

How Strong Is U.S. Xpress Enterprises’ Balance Sheet?

We can see from the most recent balance sheet that U.S. Xpress Enterprises had liabilities of US$352.0m falling due within a year, and liabilities of US$539.4m due beyond that. On the other hand, it had cash of US$5.28m and US$237.5m worth of receivables due within a year. So its liabilities total US$648.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$428.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, U.S. Xpress Enterprises would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

U.S. Xpress Enterprises has a debt to EBITDA ratio of 2.6 and its EBIT covered its interest expense 3.0 times. This suggests that while the debt levels are significant, we’d stop short of calling them problematic. Pleasingly, U.S. Xpress Enterprises is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 180% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine U.S. Xpress Enterprises’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, U.S. Xpress Enterprises saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, U.S. Xpress Enterprises’s level of total liabilities left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. But at least it’s pretty decent at growing its EBIT; that’s encouraging. We’re quite clear that we consider U.S. Xpress Enterprises to be really rather risky, as a result of its balance sheet health. For this reason we’re pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. There’s no doubt that we learn most about debt from the balance sheet.