Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like FirstService Corporation (TSX:FSV), with a market cap of CA$2.88B, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Let’s take a look at FSV’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into FSV here. See our latest analysis for FirstService
How does FSV’s operating cash flow stack up against its debt?
FSV’s debt levels surged from $201.2M to $250.9M over the last 12 months , which is made up of current and long term debt. With this increase in debt, FSV currently has $43.4M remaining in cash and short-term investments , ready to deploy into the business. On top of this, FSV has generated cash from operations of $109.0M over the same time period, resulting in an operating cash to total debt ratio of 43.44%, signalling that FSV’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In FSV’s case, it is able to generate 0.43x cash from its debt capital.
Does FSV’s liquid assets cover its short-term commitments?
With current liabilities at $182.8M, the company has been able to meet these commitments with a current assets level of $303.8M, leading to a 1.66x current account ratio. Usually, for Real Estate companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does FSV face the risk of succumbing to its debt-load?FSV is a relatively highly levered company with a debt-to-equity of 97.14%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 after interest and tax at least three times its net interest payments is considered financially sound. In FSV’s case, the ratio of 10.94x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving FSV ample headroom to grow its debt facilities.
Although FSV’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure FSV has company-specific issues impacting its capital structure decisions. I recommend you continue to research FirstService to get a more holistic view of the mid-cap by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for FSV’s future growth? Take a look at our free research report of analyst consensus for FSV’s outlook.
- 2. Valuation: What is FSV worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether FSV is currently mispriced by the market.
- 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.