While small-cap stocks, such as Unique Fabricating, Inc. (NYSEMKT:UFAB) with its market cap of US$26m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into UFAB here.
Does UFAB Produce Much Cash Relative To Its Debt?
UFAB has sustained its debt level by about US$55m over the last 12 months – this includes long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$1.3m , ready to be used for running the business. Moreover, UFAB has generated US$9.5m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 17%, meaning that UFAB’s debt is not covered by operating cash.
Can UFAB meet its short-term obligations with the cash in hand?
With current liabilities at US$19m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.71x. The current ratio is the number you get when you divide current assets by current liabilities. For Auto Components companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can UFAB service its debt comfortably?
UFAB is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether UFAB 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 UFAB's, case, the ratio of 1.83x 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.
Although UFAB’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. This is only a rough assessment of financial health, and I'm sure UFAB has company-specific issues impacting its capital structure decisions. I suggest you continue to research Unique Fabricating to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UFAB’s future growth? Take a look at our free research report of analyst consensus for UFAB’s outlook.
- Valuation: What is UFAB 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 UFAB 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.
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