Investors are always looking for growth in small-cap stocks like Fuller Smith & Turner PLC (LON:FSTA), with a market cap of UK£497m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into FSTA here.
How much cash does FSTA generate through its operations?
FSTA’s debt level has been constant at around UK£215m over the previous year – this includes both the current and long-term debt. At this constant level of debt, FSTA currently has UK£12m remaining in cash and short-term investments for investing into the business. Moreover, FSTA has generated UK£52m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 24%, indicating that FSTA’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 FSTA’s case, it is able to generate 0.24x cash from its debt capital.
Can FSTA pay its short-term liabilities?
Looking at FSTA’s most recent UK£102m liabilities, the company may not be able to easily meet these obligations given the level of current assets of UK£50m, with a current ratio of 0.49x.
Is FSTA’s debt level acceptable?
FSTA is a relatively highly levered company with a debt-to-equity of 64%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 FSTA’s case, the ratio of 8.2x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as FSTA’s high interest coverage is seen as responsible and safe practice.
Next Steps:
At its current level of cash flow coverage, FSTA has room for improvement to better cushion for events which may require debt repayment. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for FSTA’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Fuller Smith & Turner to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FSTA’s future growth? Take a look at our free research report of analyst consensus for FSTA’s outlook.
- Valuation: What is FSTA 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 FSTA 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.