Foley Family Wines Limited (NZSE:FFW) is a small-cap stock with a market capitalization of NZ$72m. 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? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I recommend you dig deeper yourself into FFW here.
How does FFW’s operating cash flow stack up against its debt?
FFW’s debt level has been constant at around NZ$20m over the previous year including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at NZ$2.8m for investing into the business. Moreover, FFW has produced NZ$7.2m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 36%, signalling that FFW’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FFW’s case, it is able to generate 0.36x cash from its debt capital.
Can FFW meet its short-term obligations with the cash in hand?
At the current liabilities level of NZ$17m, it appears that the company has been able to meet these commitments with a current assets level of NZ$43m, leading to a 2.57x current account ratio. Generally, for Beverage companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is FFW’s debt level acceptable?
With debt at 21% of equity, FFW may be thought of as appropriately levered. FFW is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if FFW’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For FFW, the ratio of 4.28x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving FFW ample headroom to grow its debt facilities.
Next Steps:
FFW’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how FFW has been performing in the past. I suggest you continue to research Foley Family Wines to get a more holistic view of the stock by looking at: