Investors are always looking for growth in small-cap stocks like Faster Enterprises Limited (ASX:FE8), with a market cap of A$8.43M. However, an important fact which most ignore is: how financially healthy is the business? Given that FE8 is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into FE8 here.
How does FE8’s operating cash flow stack up against its debt?
FE8’s debt levels surged from A$1.5M to A$3.7M over the last 12 months – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at A$1.0M , ready to deploy into the business. Though its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of FE8’s operating efficiency ratios such as ROA here.
Can FE8 pay its short-term liabilities?
With current liabilities at A$2.1M liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.8x, which is below the prudent industry ratio of 3x.
Does FE8 face the risk of succumbing to its debt-load?
FE8 is a relatively highly levered company with a debt-to-equity of 59.62%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since FE8 is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Are you a shareholder? FE8’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. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that its financial position may be different. I suggest researching market expectations for FE8’s future growth on our free analysis platform.
Are you a potential investor? FE8’s high debt levels on top of low cash coverage of debt as well as low liquidity coverage of near-term commitments may send potential investors running the other way. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of FE8’s track record. You should continue your analysis by taking a look at FE8’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
To help readers see pass 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.