How Financially Strong Is Unitil Corporation (NYSE:UTL)?
Investors are always looking for growth in small-cap stocks like Unitil Corporation (NYSE:UTL), with a market cap of US$759m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into UTL here.
Does UTL produce enough cash relative to debt?
UTL’s debt level has been constant at around US$469m over the previous year which accounts for long term debt. At this current level of debt, the current cash and short-term investment levels stands at US$6.3m , ready to deploy into the business. Moreover, UTL has generated US$82m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 17%, signalling that UTL’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In UTL’s case, it is able to generate 0.17x cash from its debt capital.
Does UTL’s liquid assets cover its short-term commitments?
Looking at UTL’s US$181m in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.67x.
Does UTL face the risk of succumbing to its debt-load?
With total debt exceeding equities, UTL is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In UTL’s case, the ratio of 2.71x 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.
Next Steps:
Although UTL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure UTL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Unitil to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for UTL’s future growth? Take a look at our free research report of analyst consensus for UTL’s outlook.
Historical Performance: What has UTL’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 editorial-team@simplywallst.com.
