United Overseas Australia Limited (ASX:UOS) is a small-cap stock with a market capitalization of AU$977.51M. 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? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into UOS here.
How does UOS’s operating cash flow stack up against its debt?
UOS’s debt levels surged from AU$159.73M to AU$170.30M over the last 12 months – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$294.55M for investing into the business. Moreover, UOS has produced cash from operations of AU$19.64M in the last twelve months, resulting in an operating cash to total debt ratio of 11.53%, meaning that UOS’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In UOS’s case, it is able to generate 0.12x cash from its debt capital.
Does UOS’s liquid assets cover its short-term commitments?
With current liabilities at AU$389.79M, it seems that the business has been able to meet these obligations given the level of current assets of AU$1.11B, with a current ratio of 2.84x. Generally, for Real Estate companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can UOS service its debt comfortably?With debt at 9.08% of equity, UOS may be thought of as having low leverage. This range is considered safe as UOS is not taking on too much debt obligation, which may be constraining for future growth.
UOS’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how UOS has been performing in the past. I suggest you continue to research United Overseas Australia to get a better picture of the stock by looking at:
- Historical Performance: What has UOS’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.