While small-cap stocks, such as Uranium Energy Corp (AMEX:UEC) with its market cap of USD $215.08M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. View our latest analysis for Uranium Energy
Does UEC generate an acceptable amount of cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These adverse events bring devastation and yet does not absolve the company from its debt. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. In the case of UEC, operating cash flow turned out to be -0.54x its debt level over the past twelve months. This means what UEC can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at UEC’s operations at this point in time.
Does UEC’s liquid assets cover its short-term commitments?
In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. In times of adverse events, UEC may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that UEC is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Is UEC’s level of debt at an acceptable level?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. UEC’s debt-to-equity ratio stands at 41.74%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet.
Are you a shareholder? UEC’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. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that UEC’s financial situation may change. I recommend researching market expectations for UEC’s future growth on our free analysis platform.
Are you a potential investor? Although short-term liquidity isn’t an issue, UEC’s high debt levels on top of poor cash coverage may not build the strongest investment case. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of UEC’s track record. You should continue your analysis by taking a look at UEC’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
To help readers see pass 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.