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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.' 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 note that USP Group Limited (SGX:BRS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
Check out our latest analysis for USP Group
How Much Debt Does USP Group Carry?
The chart below, which you can click on for greater detail, shows that USP Group had S$46.7m in debt in June 2019; about the same as the year before. However, it does have S$3.61m in cash offsetting this, leading to net debt of about S$43.1m.
A Look At USP Group's Liabilities
Zooming in on the latest balance sheet data, we can see that USP Group had liabilities of S$29.7m due within 12 months and liabilities of S$30.0m due beyond that. On the other hand, it had cash of S$3.61m and S$8.69m worth of receivables due within a year. So its liabilities total S$47.5m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the S$3.88m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt At the end of the day, USP Group would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since USP Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year USP Group actually shrunk its revenue by 4.8%, to S$40m. That's not what we would hope to see.