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While small-cap stocks, such as Finbar Group Limited (ASX:FRI) with its market cap of AU$227m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into FRI here.
How does FRI’s operating cash flow stack up against its debt?
FRI has shrunken its total debt levels in the last twelve months, from AU$152m to AU$56m – this includes both the current and long-term debt. With this reduction in debt, FRI’s cash and short-term investments stands at AU$60m , ready to deploy into the business. Additionally, FRI has produced cash from operations of AU$55m over the same time period, leading to an operating cash to total debt ratio of 99%, indicating that FRI’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In FRI’s case, it is able to generate 0.99x cash from its debt capital.
Does FRI’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$53m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of AU$184m, with a current ratio of 3.47x. Having said that, a ratio greater than 3x may be considered as quite high, and some might argue FRI could be holding too much capital in a low-return investment environment.
Does FRI face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 22%, FRI’s debt level may be seen as prudent. This range is considered safe as FRI is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.
Next Steps:
FRI’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for FRI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Finbar Group to get a better picture of the stock by looking at:
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Future Outlook: What are well-informed industry analysts predicting for FRI’s future growth? Take a look at our free research report of analyst consensus for FRI’s outlook.
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Valuation: What is FRI 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 FRI is currently mispriced by the market.
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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 editorial-team@simplywallst.com.