Mid-caps stocks, like The Ultimate Software Group Inc (NASDAQ:ULTI) with a market capitalization of USD $5.71B, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. I will take you through a few basic checks to assess the financial health of companies with no debt. View our latest analysis for Ultimate Software Group
Does ULTI face the risk of succumbing to its debt-load?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. In the case of ULTI, the debt-to-equity ratio is 2.04%, which means debt is low and does not pose any significant threat to the company’s operations. We can test if ULTI’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. ULTI’s profits amply covers interest at 42.5 times, which is seen as relatively safe. Debtors may be willing to loan the company more money, giving ULTI ample headroom to grow its debt facilities.
Can ULTI pay its short-term liabilities?
Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. To assess this, I compare ULTI’s cash and other liquid assets against its upcoming debt. Our analysis shows that ULTI is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Next Steps:
Are you a shareholder? ULTI’s high cash coverage and low levels of debt indicate its ability to use its borrowings efficiently in order to produce a healthy cash flow. Since ULTI’s financial position could change over time, I recommend assessing market expectations for ULTI’s future growth on our free analysis platform.
Are you a potential investor? While investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. ULTI’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass 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.