Is Filta Group Holdings plc (LON:FLTA) A Financially Sound Company?

Simply Wall St

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While small-cap stocks, such as Filta Group Holdings plc (LON:FLTA) with its market cap of UK£55m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to 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 not a comprehensive overview, so I suggest you dig deeper yourself into FLTA here.

Does FLTA Produce Much Cash Relative To Its Debt?

FLTA has built up its total debt levels in the last twelve months, from UK£1.0m to UK£4.7m , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at UK£6.8m to keep the business going. Additionally, FLTA has produced cash from operations of UK£805k during the same period of time, resulting in an operating cash to total debt ratio of 17%, indicating that FLTA’s current level of operating cash is not high enough to cover debt.

Does FLTA’s liquid assets cover its short-term commitments?

With current liabilities at UK£8.2m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.59x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Commercial Services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

AIM:FLTA Historical Debt, June 25th 2019

Is FLTA’s debt level acceptable?

FLTA is a relatively highly levered company with a debt-to-equity of 55%. 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 FLTA 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 FLTA's, case, the ratio of 47.76x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as FLTA’s high interest coverage is seen as responsible and safe practice.

Next Steps:

FLTA’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 FLTA'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 FLTA has been performing in the past. You should continue to research Filta Group Holdings to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for FLTA’s future growth? Take a look at our free research report of analyst consensus for FLTA’s outlook.
  2. Valuation: What is FLTA 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 FLTA is currently mispriced by the market.
  3. 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.