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Investors are always looking for growth in small-cap stocks like Unique Fabricating, Inc. (NYSEMKT:UFAB), with a market cap of US$34m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about 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, potential investors would need to take a closer look, and I suggest you dig deeper yourself into UFAB here.
UFAB’s Debt (And Cash Flows)
UFAB’s debt levels surged from US$54m to US$56m over the last 12 months – this includes long-term debt. With this rise in debt, UFAB’s cash and short-term investments stands at US$1.4m to keep the business going. Additionally, UFAB has generated cash from operations of US$9.4m in the last twelve months, leading to an operating cash to total debt ratio of 17%, signalling that UFAB’s operating cash is less than its debt.
Can UFAB pay its short-term liabilities?
At the current liabilities level of US$19m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.72x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Auto Components companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does UFAB face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, UFAB is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 UFAB’s case, the ratio of 2.57x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
UFAB’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. This is only a rough assessment of financial health, and I’m sure UFAB has company-specific issues impacting its capital structure decisions. I recommend you continue to research Unique Fabricating to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UFAB’s future growth? Take a look at our free research report of analyst consensus for UFAB’s outlook.
- Historical Performance: What has UFAB’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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.