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What You Must Know About Unique Fabricating, Inc.’s (NYSEMKT:UFAB) Financial Strength

Lacy Summers

Investors are always looking for growth in small-cap stocks like Unique Fabricating, Inc. (NYSEMKT:UFAB), with a market cap of US$48m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, 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. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into UFAB here.

How does UFAB’s operating cash flow stack up against its debt?

UFAB has sustained its debt level by about US$56m over the last 12 months including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$983k , ready to deploy into the business. Additionally, UFAB has generated cash from operations of US$9.0m over the same time period, resulting in an operating cash to total debt ratio of 16%, signalling that UFAB’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 UFAB’s case, it is able to generate 0.16x cash from its debt capital.

Can UFAB meet its short-term obligations with the cash in hand?

With current liabilities at US$23m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.39x. For Auto Components 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.

AMEX:UFAB Historical Debt December 25th 18

Can UFAB service its debt comfortably?

With total debt exceeding equities, UFAB 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 UFAB’s case, the ratio of 3.55x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving UFAB ample headroom to grow its debt facilities.

Next Steps:

UFAB’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around UFAB’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure UFAB has company-specific issues impacting its capital structure decisions. I recommend you continue to research Unique Fabricating to get a more holistic view of the small-cap by looking at:

  1. 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.
  2. Historical Performance: What has UFAB’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.
  3. 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.