What Does Fope S.p.A.'s (BIT:FPE) Balance Sheet Tell Us About It?
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Investors are always looking for growth in small-cap stocks like Fope S.p.A. (BIT:FPE), with a market cap of €37m. 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, 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, these checks don't give you a full picture, so I suggest you dig deeper yourself into FPE here.
FPE’s Debt (And Cash Flows)
FPE has built up its total debt levels in the last twelve months, from €4.8m to €8.1m , which includes long-term debt. With this rise in debt, FPE's cash and short-term investments stands at €8.0m , ready to be used for running the business. Additionally, FPE has generated €4.3m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 53%, signalling that FPE’s current level of operating cash is high enough to cover debt.
Does FPE’s liquid assets cover its short-term commitments?
With current liabilities at €7.9m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.87x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Luxury companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can FPE service its debt comfortably?
With a debt-to-equity ratio of 51%, FPE can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether FPE 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 FPE's, case, the ratio of 52.8x 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.
Next Steps:
FPE’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. Since there is also no concerns around FPE's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how FPE has been performing in the past. I suggest you continue to research Fope to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for FPE’s future growth? Take a look at our free research report of analyst consensus for FPE’s outlook.
Valuation: What is FPE 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 FPE 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.
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 editorial-team@simplywallst.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.
