Investors are always looking for growth in small-cap stocks like AS VEF (MUN:UIJ), with a market cap of €2.9m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into UIJ here.
Does UIJ produce enough cash relative to debt?
Over the past year, UIJ has maintained its debt levels at around €2.5m including long-term debt. At this current level of debt, UIJ’s cash and short-term investments stands at €309k for investing into the business. Additionally, UIJ has generated €402k in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 16%, indicating that UIJ’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In UIJ’s case, it is able to generate 0.16x cash from its debt capital.
Can UIJ meet its short-term obligations with the cash in hand?
With current liabilities at €172k, it seems that the business has been able to meet these commitments with a current assets level of €389k, leading to a 2.26x current account ratio. Generally, for Real Estate companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is UIJ’s debt level acceptable?
With a debt-to-equity ratio of 75%, UIJ can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether UIJ is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In UIJ’s, case, the ratio of 3.94x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as UIJ’s high interest coverage is seen as responsible and safe practice.
UIJ’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 UIJ has been performing in the past. I recommend you continue to research AS VEF to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UIJ’s future growth? Take a look at our free research report of analyst consensus for UIJ’s outlook.
- Valuation: What is UIJ worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether UIJ is currently mispriced by the market.
- 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.
To help readers see past 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. For errors that warrant correction please contact the editor at email@example.com.