While small-cap stocks, such as Ubisense Group Plc (LON:UBI) with its market cap of UK£50m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. IT companies, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into UBI here.
Does UBI produce enough cash relative to debt?
UBI has built up its total debt levels in the last twelve months, from UK£3.3m to UK£4.5m , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at UK£5.8m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of UBI’s operating efficiency ratios such as ROA here.
Can UBI pay its short-term liabilities?
At the current liabilities level of UK£8.1m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.86x. For IT 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 UBI service its debt comfortably?
UBI is a relatively highly levered company with a debt-to-equity of 48%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since UBI is currently unprofitable, there’s a question of sustainability of its current operations. 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 UBI’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 UBI has company-specific issues impacting its capital structure decisions. I suggest you continue to research Ubisense Group to get a better picture of the small-cap by looking at:
- Historical Performance: What has UBI’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.
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 email@example.com.