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Investors are always looking for growth in small-cap stocks like Five Star Senior Living Inc. (NASDAQ:FVE), with a market cap of US$28m. However, an important fact which most ignore is: how financially healthy is the business? Given that FVE is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into FVE here.
Does FVE Produce Much Cash Relative To Its Debt?
Over the past year, FVE has ramped up its debt from US$8.1m to US$1.5b , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$59m , 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 FVE’s operating efficiency ratios such as ROA here.
Can FVE pay its short-term liabilities?
Looking at FVE’s US$407m in current liabilities, the company may not be able to easily meet these obligations given the level of current assets of US$162m, with a current ratio of 0.4x. The current ratio is calculated by dividing current assets by current liabilities.
Does FVE face the risk of succumbing to its debt-load?
With debt reaching 56% of equity, FVE 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. Though, since FVE is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although FVE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for FVE's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Five Star Senior Living to get a more holistic view of the stock by looking at:
- Historical Performance: What has FVE'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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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.