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While small-cap stocks, such as Unifi, Inc. (NYSE:UFI) with its market cap of US$369m, 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 crucial, as mismanagement of capital can lead to 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, this is just a partial view of the stock, and I suggest you dig deeper yourself into UFI here.
Does UFI Produce Much Cash Relative To Its Debt?
UFI has sustained its debt level by about US$130m over the last 12 months – this includes long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$27m , ready to be used for running the business. Moreover, UFI has generated US$13m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 10.0%, signalling that UFI’s operating cash is less than its debt.
Does UFI’s liquid assets cover its short-term commitments?
At the current liabilities level of US$72m, the company has been able to meet these commitments with a current assets level of US$268m, leading to a 3.73x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Is UFI’s debt level acceptable?
UFI’s level of debt is appropriate relative to its total equity, at 33%. This range is considered safe as UFI is not taking on too much debt obligation, which may be constraining for future growth. We can test if UFI’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For UFI, the ratio of 3.63x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as UFI’s high interest coverage is seen as responsible and safe practice.
UFI’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven't considered other factors such as how UFI has been performing in the past. I suggest you continue to research Unifi to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UFI’s future growth? Take a look at our free research report of analyst consensus for UFI’s outlook.
- Valuation: What is UFI 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 UFI 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 email@example.com. 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.