Future Enterprises Limited (NSE:FELDVR) is a small-cap stock with a market capitalization of ₹18b. 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? 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 few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into FELDVR here.
How much cash does FELDVR generate through its operations?
Over the past year, FELDVR has ramped up its debt from ₹53b to ₹58b , which includes long-term debt. With this increase in debt, FELDVR’s cash and short-term investments stands at ₹1.3b for investing into the business. On top of this, FELDVR has produced ₹11b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 19%, indicating that FELDVR’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 FELDVR’s case, it is able to generate 0.19x cash from its debt capital.
Does FELDVR’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹14b, it seems that the business has been able to meet these commitments with a current assets level of ₹28b, leading to a 1.99x current account ratio. Usually, for Industrials 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 FELDVR’s debt level acceptable?
Since total debt levels have outpaced equities, FELDVR is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether FELDVR is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In FELDVR’s, case, the ratio of 0.88x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although FELDVR’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how FELDVR has been performing in the past. I suggest you continue to research Future Enterprises to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FELDVR’s future growth? Take a look at our free research report of analyst consensus for FELDVR’s outlook.
- Historical Performance: What has FELDVR’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.
- 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 email@example.com.