Folkestone Limited (ASX:FLK) is a small-cap stock with a market capitalization of AUD A$178.21M. 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? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. View our latest analysis for Folkestone
Does FLK generate an acceptable amount of cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These adverse events bring devastation and yet does not absolve the company from its debt. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. Last year, FLK’s operating cash flow exceeded its debt obligations, which means FLK generates enough money in a year through its operations to pay off its near-term debt. Hence, debt poses a virtually insignificant risk for the company. This is great news for both debtholders and shareholders, as the company exhibits cautious cash and debt management.
Does FLK’s liquid assets cover its short-term commitments?
What about its other commitments such as payments to suppliers and salaries to its employees? In times of adverse events, FLK may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that FLK does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Can FLK service its debt comfortably?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. FLK’s debt-to-equity ratio stands at 6.41%, which means debt is low and does not pose any significant threat to the company’s operations. 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 at least three times its interest payments is considered financially sound. FLK’s profits amply covers interest at 22.74 times, which is seen as relatively safe. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.