While small-cap stocks, such as Uponor Oyj (HEL:UPONOR) with its market cap of €773m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into UPONOR here.
UPONOR’s Debt (And Cash Flows)
UPONOR has shrunk its total debt levels in the last twelve months, from €259m to €177m – this includes long-term debt. With this debt payback, UPONOR’s cash and short-term investments stands at €38m to keep the business going. On top of this, UPONOR has produced €80m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 45%, indicating that UPONOR’s current level of operating cash is high enough to cover debt.
Does UPONOR’s liquid assets cover its short-term commitments?
At the current liabilities level of €220m, it appears that the company has been able to meet these commitments with a current assets level of €393m, leading to a 1.78x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Building companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does UPONOR face the risk of succumbing to its debt-load?
UPONOR is a relatively highly levered company with a debt-to-equity of 50%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In UPONOR’s case, the ratio of 33.43x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving UPONOR ample headroom to grow its debt facilities.
Although UPONOR’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around UPONOR’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for UPONOR’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Uponor Oyj to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UPONOR’s future growth? Take a look at our free research report of analyst consensus for UPONOR’s outlook.
- Valuation: What is UPONOR 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 UPONOR 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.
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