While small-cap stocks, such as Farmmi, Inc. (NASDAQ:FAMI) with its market cap of US$38m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, these checks don’t give you a full picture, so I suggest you dig deeper yourself into FAMI here.
FAMI’s Debt (And Cash Flows)
FAMI’s debt levels have fallen from US$2.7m to US$2.2m over the last 12 months , which includes long-term debt. With this reduction in debt, FAMI’s cash and short-term investments stands at US$4.9m , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of FAMI’s operating efficiency ratios such as ROA here.
Does FAMI’s liquid assets cover its short-term commitments?
With current liabilities at US$2.2m, it seems that the business has been able to meet these commitments with a current assets level of US$21m, leading to a 9.6x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Is FAMI’s debt level acceptable?
With debt at 12% of equity, FAMI may be thought of as appropriately levered. FAMI is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether FAMI 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 FAMI’s, case, the ratio of 20.03x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
FAMI has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure FAMI has company-specific issues impacting its capital structure decisions. You should continue to research Farmmi to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FAMI’s future growth? Take a look at our free research report of analyst consensus for FAMI’s outlook.
- Historical Performance: What has FAMI’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.
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