How Financially Strong Is Frontier Smart Technologies Group Limited (LON:FST)?

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Frontier Smart Technologies Group Limited (LON:FST) is a small-cap stock with a market capitalization of UK£15m. 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 Semiconductor industry, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into FST here.

Does FST produce enough cash relative to debt?

FST has built up its total debt levels in the last twelve months, from US$4.5m to US$6.5m made up of predominantly near term debt. With this rise in debt, FST’s cash and short-term investments stands at US$3.4m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of FST’s operating efficiency ratios such as ROA here.

Can FST meet its short-term obligations with the cash in hand?

At the current liabilities level of US$19m, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$17m, leading to a current ratio of 0.93x.

AIM:FST Historical Debt February 12th 19
AIM:FST Historical Debt February 12th 19

Is FST’s debt level acceptable?

With a debt-to-equity ratio of 37%, FST’s debt level may be seen as prudent. This range is considered safe as FST is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is very low with FST, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

FST has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how FST has been performing in the past. I recommend you continue to research Frontier Smart Technologies Group to get a more holistic view of the stock by looking at:

  1. Valuation: What is FST 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 FST is currently mispriced by the market.
  2. Historical Performance: What has FST’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.

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.