Investors are always looking for growth in small-cap stocks like U&I Learning NV (EBR:UNI), with a market cap of €7.6k. However, an important fact which most ignore is: how financially healthy is the business? Since UNI is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into UNI here.
How much cash does UNI generate through its operations?
UNI has shrunken its total debt levels in the last twelve months, from €3.0m to €2.8m , which includes long-term debt. With this reduction in debt, UNI’s cash and short-term investments stands at €1.8m for investing into the business. Moreover, UNI has generated cash from operations of €1.0m over the same time period, resulting in an operating cash to total debt ratio of 36%, signalling that UNI’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In UNI’s case, it is able to generate 0.36x cash from its debt capital.
Can UNI meet its short-term obligations with the cash in hand?
At the current liabilities level of €4.8m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.1x. For Consumer Services companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is UNI’s debt level acceptable?
With total debt exceeding equities, UNI is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since UNI is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
UNI’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 UNI’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research U&I Learning to get a more holistic view of the small-cap by looking at: