Future Enterprises Limited (NSE:FELDVR): Time For A Financial Health Check

Future Enterprises Limited (NSE:FELDVR) is a small-cap stock with a market capitalization of ₹19b. 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. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into FELDVR here.

FELDVR’s Debt (And Cash Flows)

FELDVR has built up its total debt levels in the last twelve months, from ₹53b to ₹58b – this includes long-term debt. With this growth in debt, FELDVR currently has ₹1.3b remaining in cash and short-term investments to keep the business going. On top of this, FELDVR has generated cash from operations of ₹11b over the same time period, resulting in an operating cash to total debt ratio of 19%, signalling that FELDVR’s debt is not covered by operating cash.

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

Looking at FELDVR’s ₹14b in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.99x. The current ratio is the number you get when you divide current assets by current liabilities. For Luxury 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 FELDVR face the risk of succumbing to its debt-load?

With total debt exceeding equity, FELDVR is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established 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 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 be more reluctant to lend out more funding as FELDVR’s low interest coverage already puts the company at higher risk of default.

Next Steps:

FELDVR’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around FELDVR's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how FELDVR has been performing in the past. You should continue to research Future Enterprises to get a more holistic view of the small-cap by looking at:

1. 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.
2. 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.
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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.