Is Unified Factory S.A. (WSE:UFC) A Financially Sound Company?

Investors are always looking for growth in small-cap stocks like Unified Factory S.A. (WSE:UFC), with a market cap of zł7.8m. However, an important fact which most ignore is: how financially healthy is the business? Given that UFC is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into UFC here.

UFC’s Debt (And Cash Flows)

UFC’s debt levels have fallen from zł36m to zł26m over the last 12 months – this includes long-term debt. With this debt repayment, UFC currently has zł533k remaining in cash and short-term investments , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can examine some of UFC’s operating efficiency ratios such as ROA here.

Does UFC’s liquid assets cover its short-term commitments?

With current liabilities at zł7.5m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.42x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Software companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

WSE:UFC Historical Debt, March 14th 2019
WSE:UFC Historical Debt, March 14th 2019

Is UFC’s debt level acceptable?

UFC is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since UFC is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

UFC’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how UFC has been performing in the past. I recommend you continue to research Unified Factory to get a more holistic view of the small-cap by looking at:

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