Are CVR Partners LP's (UAN) Interest Costs Too High?

Investors are always looking for growth in small-cap stocks like CVR Partners LP (NYSE:UAN), with a market cap of $396.49M. However, an important fact which most ignore is: how financially healthy is the business? Given that UAN is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into UAN here.

How does UAN’s operating cash flow stack up against its debt?

UAN has built up its total debt levels in the last twelve months, from $124.9M to $623.1M , which is made up of current and long term debt. With this increase in debt, UAN currently has $55.6M remaining in cash and short-term investments , ready to deploy into the business. Moreover, UAN has generated $45.0M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 0.07x, indicating that UAN’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In UAN’s case, it is able to generate 0.07x cash from its debt capital.

Can UAN meet its short-term obligations with the cash in hand?

Looking at UAN’s most recent $63.0M liabilities, it seems that the business has been able to meet these commitments with a current assets level of $134.5M, leading to a 2.13x current account ratio. For chemicals companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does UAN face the risk of succumbing to its debt-load?

UAN is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since UAN is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

Are you a shareholder? UAN’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that UAN's financial situation may change. I suggest researching market expectations for UAN's future growth on our free analysis platform.

Are you a potential investor? UAN’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I encourage you to continue your research by taking a look at UAN's past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.