While small-cap stocks, such as Flexible Solutions International Inc. (NYSEMKT:FSI) with its market cap of US$30m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes crucial, since poor capital management may bring about 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. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into FSI here.
FSI’s Debt (And Cash Flows)
FSI has built up its total debt levels in the last twelve months, from US$602k to US$8.1m , which includes long-term debt. With this increase in debt, FSI currently has US$7.9m remaining in cash and short-term investments , ready to be used for running the business. Moving on, operating cash flow was negative 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 assess some of FSI’s operating efficiency ratios such as ROA here.
Does FSI’s liquid assets cover its short-term commitments?
Looking at FSI’s US$6.1m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$21m, with a current ratio of 3.47x. The current ratio is calculated by dividing current assets by current liabilities. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Is FSI’s debt level acceptable?
With debt reaching 42% of equity, FSI may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if FSI’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For FSI, the ratio of 19.15x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving FSI ample headroom to grow its debt facilities.
FSI’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for FSI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Flexible Solutions International to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FSI’s future growth? Take a look at our free research report of analyst consensus for FSI’s outlook.
- Historical Performance: What has FSI’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.
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 email@example.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.