Ultima United Limited (ASX:UUL) is a small-cap stock with a market capitalization of AU$1.94m. 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 understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into UUL here.
How much cash does UUL generate through its operations?
Over the past year, UUL has ramped up its debt from AU$925.65k to AU$1.41m , which is made up of current and long term debt. With this increase in debt, UUL currently has AU$615.97k remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of UUL’s operating efficiency ratios such as ROA here.
Can UUL pay its short-term liabilities?
At the current liabilities level of AU$155.90k liabilities, the company has been able to meet these obligations given the level of current assets of AU$2.52m, with a current ratio of 16.16x. However, anything above 3x is considered high and could mean that UUL has too much idle capital in low-earning investments.
Can UUL service its debt comfortably?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. But since UUL is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
At its current level of cash flow coverage, UUL has room for improvement to better cushion for events which may require debt repayment. 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 UUL has been performing in the past. I recommend you continue to research Ultima United to get a more holistic view 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.