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Investors are always looking for growth in small-cap stocks like ULS Technology plc (LON:ULS), with a market cap of UK£42m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into ULS here.
ULS’s Debt (And Cash Flows)
ULS's debt level has been constant at around UK£5.3m over the previous year including long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at UK£1.8m , ready to be used for running the business. Moreover, ULS has generated cash from operations of UK£5.9m during the same period of time, resulting in an operating cash to total debt ratio of 112%, indicating that ULS’s operating cash is sufficient to cover its debt.
Can ULS pay its short-term liabilities?
At the current liabilities level of UK£9.7m, it appears that the company may not be able to easily meet these obligations given the level of current assets of UK£4.0m, with a current ratio of 0.41x. The current ratio is the number you get when you divide current assets by current liabilities.
Can ULS service its debt comfortably?
With debt reaching 51% of equity, ULS may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ULS's case, the ratio of 44.54x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as ULS’s high interest coverage is seen as responsible and safe practice.
Although ULS’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for ULS's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research ULS Technology to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ULS’s future growth? Take a look at our free research report of analyst consensus for ULS’s outlook.
- Valuation: What is ULS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ULS is currently mispriced by the market.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.