While small-cap stocks, such as Universal Security Instruments Inc (AMEX:UUU) with its market cap of US$3.58M, 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 Electronic industry, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes crucial. 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’d encourage you to dig deeper yourself into UUU here.
Does UUU generate enough cash through operations?
Over the past year, UUU has ramped up its debt from US$1.38M to US$3.47M , which is mainly comprised of near term debt. With this growth in debt, UUU currently has US$262.36K remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of UUU’s operating efficiency ratios such as ROA here.
Can UUU pay its short-term liabilities?
At the current liabilities level of US$4.16M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$7.71M, with a current ratio of 1.86x. Generally, for Electronic companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is UUU’s debt level acceptable?
With debt reaching 40.70% of equity, UUU may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since UUU is presently loss-making, there’s a question of sustainability of its current operations. 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:
UUU’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, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how UUU has been performing in the past. I recommend you continue to research Universal Security Instruments to get a more holistic view of the stock by looking at: