Stock Analysis

Here's Why Unifi (NYSE:UFI) Has A Meaningful Debt Burden

  •  Updated
NYSE:UFI
Source: Shutterstock

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Unifi, Inc. (NYSE:UFI) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Unifi

What Is Unifi's Debt?

As you can see below, at the end of July 2022, Unifi had US$114.0m of debt, up from US$79.1m a year ago. Click the image for more detail. However, it does have US$53.3m in cash offsetting this, leading to net debt of about US$60.7m.

debt-equity-history-analysis
NYSE:UFI Debt to Equity History September 1st 2022

A Look At Unifi's Liabilities

According to the last reported balance sheet, Unifi had liabilities of US$108.8m due within 12 months, and liabilities of US$118.5m due beyond 12 months. Offsetting this, it had US$53.3m in cash and US$106.7m in receivables that were due within 12 months. So its liabilities total US$67.3m more than the combination of its cash and short-term receivables.

Unifi has a market capitalization of US$209.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Unifi has a low net debt to EBITDA ratio of only 1.1. And its EBIT easily covers its interest expense, being 17.8 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. It is just as well that Unifi's load is not too heavy, because its EBIT was down 46% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Unifi can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last two years, Unifi burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Unifi's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. Once we consider all the factors above, together, it seems to us that Unifi's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Unifi is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

What are the risks and opportunities for Unifi?

Unifi, Inc., together with its subsidiaries, manufactures and sells recycled and synthetic products in the United States, China, Brazil, and internationally.

View Full Analysis

Risks

No risks detected for UFI from our risks checks.

View all Risks and Rewards

Share Price

Market Cap

1Y Return

View Company Report

About NYSE:UFI

Unifi

Unifi, Inc., together with its subsidiaries, manufactures and sells recycled and synthetic products in the United States, China, Brazil, and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation3
Future Growth0
Past Performance0
Financial Health4
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Adequate balance sheet and fair value.

Similar Companies