Universal Electronics Inc (NASDAQ:UEIC) is a small-cap stock with a market capitalization of US$601.64m. 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 Consumer Durables industry facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I suggest you dig deeper yourself into UEIC here.
How does UEIC’s operating cash flow stack up against its debt?
UEIC has built up its total debt levels in the last twelve months, from US$92.00m to US$111.00m made up of predominantly near term debt. With this increase in debt, UEIC’s cash and short-term investments stands at US$59.43m for investing into the business. Moreover, UEIC has produced US$14.78m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 13.32%, indicating that UEIC’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In UEIC’s case, it is able to generate 0.13x cash from its debt capital.
Can UEIC pay its short-term liabilities?
At the current liabilities level of US$296.26m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$395.36m, with a current ratio of 1.33x. Generally, for Consumer Durables companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is UEIC’s debt level acceptable?
With debt reaching 40.00% of equity, UEIC may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether UEIC 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 UEIC’s, case, the ratio of 0.97x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as UEIC’s low interest coverage already puts the company at higher risk of default.
UEIC’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for UEIC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Universal Electronics to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UEIC’s future growth? Take a look at our free research report of analyst consensus for UEIC’s outlook.
- Valuation: What is UEIC 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 UEIC 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.
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 firstname.lastname@example.org.