While small-cap stocks, such as Unit Corporation (NYSE:UNT) with its market cap of US$898m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Energy Services industry, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into UNT here.
How does UNT’s operating cash flow stack up against its debt?
UNT has shrunken its total debt levels in the last twelve months, from US$820m to US$656m , which also accounts for long term debt. With this debt payback, UNT’s cash and short-term investments stands at US$92m for investing into the business. Additionally, UNT has generated US$331m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 50%, indicating that UNT’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In UNT’s case, it is able to generate 0.5x cash from its debt capital.
Does UNT’s liquid assets cover its short-term commitments?
With current liabilities at US$240m, the company may not have an easy time meeting these commitments with a current assets level of US$224m, leading to a current ratio of 0.93x.
Does UNT face the risk of succumbing to its debt-load?
With debt at 39% of equity, UNT may be thought of as appropriately levered. UNT is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether UNT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In UNT’s, case, the ratio of 2.68x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
UNT’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure UNT has company-specific issues impacting its capital structure decisions. I recommend you continue to research Unit to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UNT’s future growth? Take a look at our free research report of analyst consensus for UNT’s outlook.
- Historical Performance: What has UNT’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past 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. For errors that warrant correction please contact the editor at email@example.com.