Investors are always looking for growth in small-cap stocks like UFP Technologies, Inc. (NASDAQ:UFPT), with a market cap of US$259m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company’s financial health becomes crucial, since poor capital management may bring about 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. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into UFPT here.
UFPT’s Debt (And Cash Flows)
UFPT has increased its debt level by about US$25m over the last 12 months including long-term debt. With this increase in debt, UFPT’s cash and short-term investments stands at US$3.2m , ready to be used for running the business. Additionally, UFPT has generated cash from operations of US$21m during the same period of time, leading to an operating cash to total debt ratio of 85%, signalling that UFPT’s current level of operating cash is high enough to cover debt.
Can UFPT meet its short-term obligations with the cash in hand?
With current liabilities at US$21m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.69x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Packaging companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is UFPT’s debt level acceptable?
With debt at 18% of equity, UFPT may be thought of as appropriately levered. This range is considered safe as UFPT is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether UFPT 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 UFPT’s, case, the ratio of 17x 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.
Next Steps:
UFPT’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how UFPT has been performing in the past. I suggest you continue to research UFP Technologies to get a better picture of the stock by looking at:
- Valuation: What is UFPT 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 UFPT is currently mispriced by the market.
- Historical Performance: What has UFPT’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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