Are AB Fagerhult’s (STO:FAG) Interest Costs Too High?

AB Fagerhult (STO:FAG) is a small-cap stock with a market capitalization of kr9.0b. 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? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into FAG here.

How much cash does FAG generate through its operations?

Over the past year, FAG has maintained its debt levels at around kr2.8b made up of current and long term debt. At this current level of debt, FAG’s cash and short-term investments stands at kr527m , ready to deploy into the business. Moreover, FAG has generated kr367m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 13%, meaning that FAG’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FAG’s case, it is able to generate 0.13x cash from its debt capital.

Does FAG’s liquid assets cover its short-term commitments?

At the current liabilities level of kr1.0b liabilities, it appears that the company has been able to meet these commitments with a current assets level of kr2.7b, leading to a 2.58x current account ratio. Usually, for Electrical 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.

OM:FAG Historical Debt November 6th 18
OM:FAG Historical Debt November 6th 18

Can FAG service its debt comfortably?

Since total debt levels have outpaced equities, FAG is a highly leveraged company. 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 FAG’s case, the ratio of 26.57x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving FAG ample headroom to grow its debt facilities.

Next Steps:

FAG’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure FAG has company-specific issues impacting its capital structure decisions. You should continue to research AB Fagerhult to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for FAG’s future growth? Take a look at our free research report of analyst consensus for FAG’s outlook.
  2. Valuation: What is FAG 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 FAG is currently mispriced by the market.
  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.