Universal Security Instruments, Inc. (NYSEMKT:UUU) is a small-cap stock with a market capitalization of US$2.9m. 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? Since UUU is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into UUU here.
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Does UUU Produce Much Cash Relative To Its Debt?
UUU has built up its total debt levels in the last twelve months, from US$5.2m to US$7.4m . With this increase in debt, UUU's cash and short-term investments stands at US$144k , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can assess some of UUU’s operating efficiency ratios such as ROA here.
Can UUU pay its short-term liabilities?
Looking at UUU’s US$8.3m in current liabilities, the company has been able to meet these commitments with a current assets level of US$11m, leading to a 1.28x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Electronic companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does UUU face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 67%, UUU can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since UUU is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although UUU’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. Since there is also no concerns around UUU's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how UUU has been performing in the past. I suggest you continue to research Universal Security Instruments to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has UUU'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.
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