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Is Uni-Select Inc.'s (TSE:UNS) Balance Sheet A Threat To Its Future?

Simply Wall St

Uni-Select Inc. (TSE:UNS) is a small-cap stock with a market capitalization of CA$644m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company's financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into UNS here.

UNS’s Debt (And Cash Flows)

UNS's debt level has been constant at around US$427m over the previous year – this includes long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$29m to keep the business going. On top of this, UNS has generated cash from operations of US$95m in the last twelve months, resulting in an operating cash to total debt ratio of 22%, indicating that UNS’s current level of operating cash is high enough to cover debt.

Does UNS’s liquid assets cover its short-term commitments?

At the current liabilities level of US$555m, it appears that the company has been able to meet these commitments with a current assets level of US$811m, leading to a 1.46x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Retail Distributors companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

TSX:UNS Historical Debt, April 24th 2019

Can UNS service its debt comfortably?

With debt reaching 81% of equity, UNS may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In UNS's case, the ratio of 3.99x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving UNS ample headroom to grow its debt facilities.

Next Steps:

UNS’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. Since there is also no concerns around UNS's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure UNS has company-specific issues impacting its capital structure decisions. You should continue to research Uni-Select to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for UNS’s future growth? Take a look at our free research report of analyst consensus for UNS’s outlook.
  2. Valuation: What is UNS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether UNS is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.