While small-cap stocks, such as FIH group plc (AIM:FIH) with its market cap of £37.82M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Consumer Retailing businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. 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 suggest you dig deeper yourself into FIH here.
Does FIH generate an acceptable amount of cash through operations?
FIH has built up its total debt levels in the last twelve months, from £8.5M to £9.1M , which is made up of current and long term debt. With this increase in debt, FIH’s cash and short-term investments stands at £15.1M for investing into the business. Moreover, FIH has generated £2.5M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 27.03%, indicating that FIH’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In FIH’s case, it is able to generate 0.27x cash from its debt capital.
Can FIH meet its short-term obligations with the cash in hand?
Looking at FIH’s most recent £13.1M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of £28.7M, with a current ratio of 2.2x. For consumer retailing companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is FIH’s level of debt at an acceptable level?
With debt at 21.15% of equity, FIH may be thought of as appropriately levered. FIH is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether FIH is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In FIH’s, case, the ratio of 21.53x suggests that interest is excessively covered, which means that lenders may be less hesitant to lend out more funding as FIH’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Are you a shareholder? FIH’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. Going forward, its financial position may change. You should always be keeping abreast of market expectations for FIH’s future growth on our free analysis platform.