FIH group plc (LON:FIH): Time For A Financial Health Check

FIH group plc (LON:FIH) is a small-cap stock with a market capitalization of UK£47.25m. 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? Companies operating in the Consumer Retailing industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. So, understanding the company's financial health becomes crucial. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into FIH here.

How does FIH’s operating cash flow stack up against its debt?

FIH's debt levels have fallen from UK£9.11m to UK£8.51m over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at UK£17.02m , ready to deploy into the business. On top of this, FIH has generated cash from operations of UK£4.26m over the same time period, leading to an operating cash to total debt ratio of 50.04%, meaning that FIH’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FIH’s case, it is able to generate 0.5x cash from its debt capital.

Can FIH pay its short-term liabilities?

Looking at FIH’s most recent UK£11.67m liabilities, the company has been able to meet these commitments with a current assets level of UK£29.87m, leading to a 2.56x current account ratio. Usually, for Consumer Retailing 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.

Is FIH’s debt level acceptable?

FIH’s level of debt is appropriate relative to its total equity, at 20.39%. FIH is not taking on too much debt commitment, which may be constraining for future growth. We can test if FIH’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For FIH, the ratio of 87.95x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

FIH has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven't considered other factors such as how FIH has been performing in the past. You should continue to research FIH group to get a more holistic view of the stock by looking at:

1. Valuation: What is FIH 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 FIH is currently mispriced by the market.
2. Historical Performance: What has FIH's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.