Is Focus Ventures Ltd’s (CVE:FCV) Balance Sheet A Threat To Its Future?

Focus Ventures Ltd (TSXV:FCV) is a small-cap stock with a market capitalization of CA$4.70M. 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 FCV is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into FCV here.

Does FCV generate an acceptable amount of cash through operations?

Over the past year, FCV has maintained its debt levels at around CA$4.46M made up of current and long term debt. At this current level of debt, FCV’s cash and short-term investments stands at CA$202.12K , ready to deploy into the business. Moving onto cash from operations, 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of FCV’s operating efficiency ratios such as ROA here.

Does FCV’s liquid assets cover its short-term commitments?

At the current liabilities level of CA$6.38M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of CA$949.00K, with a current ratio of 0.15x below the prudent level of 3x.

TSXV:FCV Historical Debt Mar 9th 18
TSXV:FCV Historical Debt Mar 9th 18

Is FCV’s debt level acceptable?

With debt reaching 68.63% of equity, FCV may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since FCV is presently 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:

FCV’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, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how FCV has been performing in the past. I recommend you continue to research Focus Ventures to get a more holistic view of the stock by looking at: