Is United States Cellular (NYSE:USM) a risky investment?

Some say volatility, not debt, is the best way to think about risk as an investor, but Warren Buffett famously said, “Volatility is far from synonymous with risk.” So it seems that smart people know that debt – which usually comes with it Bankruptcies are a very important factor when assessing the risk of a company. What is important is United States Cellular Corporation (NYSE:USM) carries debt. But the real question is whether this debt makes the company risky.

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a business cannot easily pay it off, either by raising capital or with its own cash flow. If the company can’t meet its legal obligations to pay down debt, shareholders could end up with nothing. However, it is more common (but still costly) for a company to have to issue shares at bargain prices, resulting in permanent shareholder dilution, just to shore up its balance sheet. However, the most common situation is for a company to manage its debt reasonably well – and to its own advantage. When considering how much debt a company has, you first need to consider its cash flow and debt together.

Check out our latest analysis for United States Cellular

How much does United States Cellular owe?

The chart below, which you can click on for more detail, shows that United States Cellular had $2.90 billion in debt as of September 2024; about the same as the year before. However, this compares to US$272.0m in cash, leading to net debt of about US$2.63b.

How strong is United States Cellular’s balance sheet?

According to the last reported balance sheet, United States Cellular had liabilities of US$909.0m due within 12 months, and liabilities of US$4.99b due beyond 12 months . Offsetting these obligations, the company had cash of US$272.0m as well as receivables valued at US$918.0m due within 12 months. So its liabilities total US$4.71 billion more than the combination of its cash and short-term receivables.

This is huge leverage relative to its market cap of $5.47 billion. This suggests that shareholders would be severely diluted if the company had to rush to shore up its balance sheet.

We use two main ratios to inform us about the level of debt relative to profits. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times earnings before interest and tax (EBIT) cover interest expense (or interest cover, for short). . Therefore, we look at debt relative to earnings, both with and without depreciation and amortization expense.

While we wouldn’t be worried about United States Cellular’s net debt to EBITDA ratio of 3.1, we believe its extremely low interest coverage of 0.99 is a sign of high leverage. It appears that the company is incurring high depreciation and amortization costs, so its debt load may be higher than it first appears, given that EBITDA is arguably a generous measure of profit. As such, shareholders should probably be aware that interest expenses appear to have had a major impact on the business recently. The good news is that United States Cellular grew its EBIT by a smooth 53% over the last twelve months. Like the milk of human kindness, this growth increases resilience and makes the company better able to manage its debt. There is no doubt that the balance sheet is where we learn the most about debt. But it is future earnings that will determine whether United States Cellular can maintain a healthy balance sheet going forward. So if you’re focused on the future, you can look at that free Report with analyst profit forecasts.

After all, a company needs free cash flow to pay off debt; Book profits are simply not enough. So we always check how much of that EBIT is converted into free cash flow. Looking at the last three years, United States Cellular actually experienced an outflow of funds overall. Debt is far riskier for companies with unreliable free cash flow, so shareholders should hope that past spending will produce free cash flow in the future.

Our view

To be honest, both the conversion of EBIT to free cash flow and United States Cellular’s track record of covering interest expense with EBIT make us rather uncomfortable with its level of debt. But at least the company is managing to grow its EBIT pretty well; that is encouraging. Looking at the balance sheet and taking all of these factors into account, we think debt makes United States Cellular stock somewhat risky. Some people like this kind of risk, but we are aware of the potential pitfalls and would therefore probably prefer the debt to be lower. There is no doubt that the balance sheet is where we learn the most about debt. However, not all investment risks lie on the balance sheet – quite the opposite. For example, we identified 1 United States Cellular warning sign what you should be aware of.

If you’re interested in investing in companies that can grow profits without the burden of debt, then check this out free List of growing companies that have net cash on the balance sheet.

Do you have feedback on this article? Worried about the content? Get in touch directly with us. Alternatively, you can also send an email to editor-team (at) simplywallst.com.

This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.