While small-cap stocks, such as Public Joint-Stock Company Ukrtelecom (FRA:UK1) with its market cap of ₴56.18m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Telecom industry facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into UK1 here.
Does UK1 produce enough cash relative to debt?
Over the past year, UK1 has ramped up its debt from ₴1.92b to ₴2.05b made up of predominantly near term debt. With this growth in debt, UK1’s cash and short-term investments stands at ₴504.32m , ready to deploy into the business. Moreover, UK1 has produced cash from operations of ₴1.84b over the same time period, leading to an operating cash to total debt ratio of 89.69%, signalling that UK1’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In UK1’s case, it is able to generate 0.9x cash from its debt capital.
Can UK1 pay its short-term liabilities?
At the current liabilities level of ₴3.21b liabilities, it seems that the business is not able to meet these obligations given the level of current assets of ₴2.53b, with a current ratio of 0.79x below the prudent level of 3x.
Is UK1’s debt level acceptable?UK1’s level of debt is appropriate relative to its total equity, at 25.51%. This range is considered safe as UK1 is not taking on too much debt obligation, which may be constraining for future growth. We can test if UK1’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For UK1, the ratio of 2.74x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
UK1 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how UK1 has been performing in the past. You should continue to research Ukrtelecom to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UK1’s future growth? Take a look at our free research report of analyst consensus for UK1’s outlook.
- Historical Performance: What has UK1’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.
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 firstname.lastname@example.org.