Ultima United Limited (ASX:UUL) is a small-cap stock with a market capitalization of AU$1.91M. 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? Since UUL is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into UUL here.
Does UUL generate an acceptable amount of cash through operations?
Over the past year, UUL has reduced its debt from AU$945.00K to AU$896.62K , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at AU$1.12M for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of UUL’s operating efficiency ratios such as ROA here.
Can UUL pay its short-term liabilities?
Looking at UUL’s most recent AU$194.00K liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.8x. Though, anything above 3x is considered high and could mean that UUL has too much idle capital in low-earning investments.
Does UUL face the risk of succumbing to its debt-load?With debt reaching 64.38% of equity, UUL 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. Though, since UUL is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
UUL’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 exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure UUL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Ultima United to get a better picture of the stock by looking at:
- Historical Performance: What has UUL’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.