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While small-cap stocks, such as Ultra Clean Holdings, Inc. (NASDAQ:UCTT) with its market cap of US$463m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Semiconductor industry, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into UCTT here.
How much cash does UCTT generate through its operations?
UCTT has built up its total debt levels in the last twelve months, from US$57m to US$374m , which includes long-term debt. With this growth in debt, UCTT’s cash and short-term investments stands at US$160m , ready to deploy into the business. Moreover, UCTT has produced US$27m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 7.1%, indicating that UCTT’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In UCTT’s case, it is able to generate 0.071x cash from its debt capital.
Can UCTT pay its short-term liabilities?
At the current liabilities level of US$176m, it seems that the business has been able to meet these obligations given the level of current assets of US$485m, with a current ratio of 2.76x. Generally, for Semiconductor 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 UCTT’s debt level acceptable?
UCTT is a relatively highly levered company with a debt-to-equity of 84%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 after interest and tax at least three times its net interest payments is considered financially sound. In UCTT’s case, the ratio of 30.26x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as UCTT’s high interest coverage is seen as responsible and safe practice.
Although UCTT’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. I admit this is a fairly basic analysis for UCTT’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Ultra Clean Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UCTT’s future growth? Take a look at our free research report of analyst consensus for UCTT’s outlook.
- Historical Performance: What has UCTT’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.