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We Think U.S. Xpress Enterprises (NYSE:USX) Is Taking Some Risk With Its Debt

Editorial Staff by Editorial Staff
May 29, 2021
0
We Think U.S. Xpress Enterprises (NYSE:USX) Is Taking Some Risk With Its Debt

Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that U.S. Xpress Enterprises, Inc. (NYSE:USX) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that U.S. Xpress Enterprises had US$338.4m of debt in March 2021, down from US$439.4m, one year before. Net debt is about the same, since the it doesn’t have much cash.

debt-equity-history-analysis
NYSE:USX Debt to Equity History May 28th 2021

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

According to the last reported balance sheet, U.S. Xpress Enterprises had liabilities of US$365.5m due within 12 months, and liabilities of US$540.9m due beyond 12 months. Offsetting this, it had US$4.37m in cash and US$232.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$669.8m.

When you consider that this deficiency exceeds the company’s US$555.7m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

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).

U.S. Xpress Enterprises’s net debt is sitting at a very reasonable 2.5 times its EBITDA, while its EBIT covered its interest expense just 3.2 times last year. 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. Pleasingly, U.S. Xpress Enterprises is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 518% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it’s worth checking how much of that EBIT is backed by free cash flow. Over the last three years, U.S. Xpress Enterprises saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

We’d go so far as to say U.S. Xpress Enterprises’s conversion of EBIT to free cash flow was disappointing. But at least it’s pretty decent at growing its EBIT; that’s encouraging. Looking at the bigger picture, it seems clear to us that U.S. Xpress Enterprises’s use of debt is creating risks for the company. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. 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.

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