Investors are always looking for growth in small-cap stocks like Phoenix New Media Limited (NYSE:FENG), with a market cap of CN¥332.77m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Internet industry, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into FENG here.
How does FENG’s operating cash flow stack up against its debt?
Over the past year, FENG has reduced its debt from CN¥494.61m to CN¥296.63m . With this debt payback, the current cash and short-term investment levels stands at CN¥855.25m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of FENG’s operating efficiency ratios such as ROA here.
Does FENG’s liquid assets cover its short-term commitments?
With current liabilities at CN¥931.84m, the company has been able to meet these commitments with a current assets level of CN¥2.04b, leading to a 2.19x current account ratio. Usually, for Internet companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does FENG face the risk of succumbing to its debt-load?FENG’s level of debt is appropriate relative to its total equity, at 12.07%. This range is considered safe as FENG is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether FENG 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 FENG’s, case, the ratio of less than 0.1x suggests is not appropriately covered lenders may be more reluctant to lend out more funding as FENG’s low interest coverage already puts the company at higher risk of default.
FENG’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure FENG has company-specific issues impacting its capital structure decisions. I suggest you continue to research Phoenix New Media to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FENG’s future growth? Take a look at our free research report of analyst consensus for FENG’s outlook.
- Valuation: What is FENG 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 FENG 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.