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Papa Murphy’s Holdings, Inc. (NASDAQ:FRSH) is a small-cap stock with a market capitalization of US$89m. 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? Assessing first and foremost the financial health is vital, 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 suggest you dig deeper yourself into FRSH here.
How much cash does FRSH generate through its operations?
FRSH’s debt level has been constant at around US$96m over the previous year including long-term debt. At this stable level of debt, FRSH currently has US$3.4m remaining in cash and short-term investments for investing into the business. Additionally, FRSH has produced US$12m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 13%, indicating that FRSH’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In FRSH’s case, it is able to generate 0.13x cash from its debt capital.
Does FRSH’s liquid assets cover its short-term commitments?
Looking at FRSH’s US$22m in current liabilities, the company may not have an easy time meeting these commitments with a current assets level of US$10m, leading to a current ratio of 0.46x.
Does FRSH face the risk of succumbing to its debt-load?
With debt reaching 99% of equity, FRSH may be thought of as relatively highly levered. 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 FRSH’s case, the ratio of 2.92x 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 FRSH’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure FRSH has company-specific issues impacting its capital structure decisions. I suggest you continue to research Papa Murphy’s Holdings to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FRSH’s future growth? Take a look at our free research report of analyst consensus for FRSH’s outlook.
- Valuation: What is FRSH 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 FRSH is currently mispriced by the market.
- 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.