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Is Ultra Clean Holdings, Inc.’s (NASDAQ:UCTT) Balance Sheet Strong Enough To Weather A Storm?

Pam Parks

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Ultra Clean Holdings, Inc. (NASDAQ:UCTT) is a small-cap stock with a market capitalization of US$447m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Semiconductor industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes vital. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into UCTT here.

Does UCTT produce enough cash relative to debt?

UCTT has built up its total debt levels in the last twelve months, from US$52m to US$341m – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$144m , ready to deploy into the business. Additionally, UCTT has generated cash from operations of US$45m in the last twelve months, leading to an operating cash to total debt ratio of 13%, indicating that UCTT’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In UCTT’s case, it is able to generate 0.13x cash from its debt capital.

Can UCTT pay its short-term liabilities?

Looking at UCTT’s US$142m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$459m, leading to a 3.23x current account ratio. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.

NasdaqGS:UCTT Historical Debt, February 25th 2019

Does UCTT face the risk of succumbing to its debt-load?

UCTT is a relatively highly levered company with a debt-to-equity of 76%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if UCTT’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 UCTT, the ratio of 8.73x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although UCTT’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. I admit this is a fairly basic analysis for UCTT’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Ultra Clean Holdings to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for UCTT’s future growth? Take a look at our free research report of analyst consensus for UCTT’s outlook.
  2. Historical Performance: What has UCTT’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.

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 editorial-team@simplywallst.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.