What does Utilitywise Plc’s (AIM:UTW) Balance Sheet Tell Us Abouts Its Future?
Utilitywise Plc (AIM:UTW) is a small-cap stock with a market capitalization of GBP £56.53M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. View our latest analysis for Utilitywise
Does UTW generate an acceptable amount of cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. UTW’s recent operating cash flow was 0.54 times its debt within the past year. This is a good sign, as over half of UTW’s near term debt can be covered by its day-to-day cash income, which reduces its riskiness to its debtholders.
Does UTW’s liquid assets cover its short-term commitments?
What about its other commitments such as payments to suppliers and salaries to its employees? As cash flow from operation is hindered by adverse events, UTW may need to liquidate its short-term assets to meet these upcoming payments. We test for UTW’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that UTW is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Can UTW service its debt comfortably?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. UTW’s debt-to-equity ratio stands at 45.33%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level. While debt-to-equity ratio has several factors at play, an easier way to check whether UTW’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. UTW’s interest on debt is sufficiently covered by earnings as it sits at around 117.46x. Debtors may be willing to loan the company more money, giving UTW ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? Although UTW’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, UTW’s financial situation may change. You should always be researching market expectations for UTW’s future growth on our free analysis platform.
Are you a potential investor? Investors shouldn’t be put off by UTW’s high debt levels based on this simple analysis. High level of cash generated from operating activities indicates its debt funding is being effectively used. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. To gain more conviction in the stock, you need to further analyse the company’s track record. As a following step, you should take a look at UTW’s past performance analysis on our free platform to figure out UTW’s financial health position.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
