Investors are always looking for growth in small-cap stocks like Forward Industries, Inc. (NASDAQ:FORD), with a market cap of US$11m. 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 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 FORD here.
How does FORD’s operating cash flow stack up against its debt?
Over the past year, FORD has borrowed debt capital of around US$2.3m accounting for long term debt. With this growth in debt, FORD currently has US$4.4m remaining in cash and short-term investments for investing into the business. On top of this, FORD has produced US$956k in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 42%, indicating that FORD’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FORD’s case, it is able to generate 0.42x cash from its debt capital.
Does FORD’s liquid assets cover its short-term commitments?
With current liabilities at US$7.6m, the company has been able to meet these obligations given the level of current assets of US$15m, with a current ratio of 2x. Usually, for Luxury 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.
Does FORD face the risk of succumbing to its debt-load?
FORD’s level of debt is appropriate relative to its total equity, at 21%. This range is considered safe as FORD is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether FORD 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 FORD’s, case, the ratio of 2.26x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
FORD’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how FORD has been performing in the past. I suggest you continue to research Forward Industries to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FORD’s future growth? Take a look at our free research report of analyst consensus for FORD’s outlook.
- Historical Performance: What has FORD’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 firstname.lastname@example.org.