While small-cap stocks, such as Universal Corporation (NYSE:UVV) with its market cap of US$1.5b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into UVV here.
How much cash does UVV generate through its operations?
UVV’s debt levels surged from US$420m to US$498m over the last 12 months , which includes long-term debt. With this increase in debt, UVV’s cash and short-term investments stands at US$138m for investing into the business. Moreover, UVV has produced cash from operations of US$35m during the same period of time, resulting in an operating cash to total debt ratio of 7.1%, indicating that UVV’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In UVV’s case, it is able to generate 0.071x cash from its debt capital.
Can UVV meet its short-term obligations with the cash in hand?
Looking at UVV’s US$358m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$1.7b, with a current ratio of 4.7x. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Is UVV’s debt level acceptable?
UVV’s level of debt is appropriate relative to its total equity, at 36%. This range is considered safe as UVV is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether UVV is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In UVV’s, case, the ratio of 11.57x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
UVV’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for UVV’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Universal to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UVV’s future growth? Take a look at our free research report of analyst consensus for UVV’s outlook.
- Historical Performance: What has UVV’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.
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