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Universal Electronics Inc. (NASDAQ:UEIC) is a small-cap stock with a market capitalization of US$508m. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into UEIC here.
Does UEIC Produce Much Cash Relative To Its Debt?
UEIC has shrunk its total debt levels in the last twelve months, from US$141m to US$128m . With this debt payback, UEIC currently has US$45m remaining in cash and short-term investments , ready to be used for running the business. Moreover, UEIC has produced cash from operations of US$20m in the last twelve months, leading to an operating cash to total debt ratio of 16%, signalling that UEIC’s operating cash is less than its debt.
Does UEIC’s liquid assets cover its short-term commitments?
Looking at UEIC’s US$289m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$391m, with a current ratio of 1.35x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Consumer Durables companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does UEIC face the risk of succumbing to its debt-load?
With debt reaching 40% of equity, UEIC may be thought of as relatively highly levered. 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 UEIC’s case, the ratio of 0.68x 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.
Although UEIC’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. 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 UEIC has been performing in the past. I suggest you continue to research Universal Electronics to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UEIC’s future growth? Take a look at our free research report of analyst consensus for UEIC’s outlook.
- Valuation: What is UEIC 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 UEIC 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.
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 email@example.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.