Investors are always looking for growth in small-cap stocks like FIH group plc (LON:FIH), with a market cap of UK£43.83m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Consumer Retailing industry facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into FIH here.
How does FIH’s operating cash flow stack up against its debt?
Over the past year, FIH has reduced its debt from UK£9.11m to UK£8.51m , which comprises of short- and long-term debt. With this reduction in debt, FIH’s cash and short-term investments stands at UK£17.02m for investing into the business. Additionally, FIH has produced UK£4.26m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 50.04%, signalling that FIH’s operating cash is sufficient to cover its 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, it seems that the business has been able to meet these commitments with a current assets level of UK£29.87m, leading to a 2.56x current account ratio. Generally, for Consumer Retailing companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can FIH service its debt comfortably?FIH’s level of debt is appropriate relative to its total equity, at 20.39%. This range is considered safe as FIH is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. 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 debtors may be willing to loan the company more money, giving FIH ample headroom to grow its debt facilities.
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 proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for FIH’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research FIH group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FIH’s future growth? Take a look at our free research report of analyst consensus for FIH’s outlook.
- 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.
- 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.