Investors are always looking for growth in small-cap stocks like First Property Group plc (LON:FPO), with a market cap of UK£68.97m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to 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. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into FPO here.
How does FPO’s operating cash flow stack up against its debt?
FPO has sustained its debt level by about UK£119.09m over the last 12 months comprising of short- and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at UK£15.32m , ready to deploy into the business. Additionally, FPO has generated cash from operations of UK£9.79m during the same period of time, leading to an operating cash to total debt ratio of 8.22%, signalling that FPO’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In FPO’s case, it is able to generate 0.082x cash from its debt capital.
Can FPO meet its short-term obligations with the cash in hand?
Looking at FPO’s most recent UK£16.85m liabilities, the company has been able to meet these obligations given the level of current assets of UK£36.16m, with a current ratio of 2.15x. For Real Estate companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does FPO face the risk of succumbing to its debt-load?FPO is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-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 FPO’s case, the ratio of 3.52x suggests that interest is appropriately 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.
FPO’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. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for FPO’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research First Property Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FPO’s future growth? Take a look at our free research report of analyst consensus for FPO’s outlook.
- Valuation: What is FPO 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 FPO 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.