Frontier Diamonds Limited (ASX:FDX) is a small-cap stock with a market capitalization of A$5.09M. 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? Since FDX is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into FDX here.
Does FDX generate an acceptable amount of cash through operations?
FDX’s debt level has been constant at around $0.8M over the previous year . At this current level of debt, FDX’s cash and short-term investments stands at $0.2M for investing into the business. However, 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 assess some of FDX’s operating efficiency ratios such as ROA here.
Does FDX’s liquid assets cover its short-term commitments?
At the current liabilities level of $1.0M liabilities, it seems that the business is not able to meet these obligations given the level of current assets of $0.2M, with a current ratio of 0.19x below the prudent level of 3x.
Can FDX service its debt comfortably?
With a debt-to-equity ratio of 64.46%, FDX can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since FDX 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? FDX’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that FDX’s financial situation may change. I recommend researching market expectations for FDX’s future growth on our free analysis platform.
Are you a potential investor? FDX’s large debt ratio on top of low cash coverage of debt in addition to low liquidity coverage of short-term expenses may send potential investors running the other way. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of FDX’s track record. As a following step, you should take a look at FDX’s past performance analysis on our free platform to conclude on FDX’s financial health.
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.