Investors are always looking for growth in small-cap stocks like Fjord1 ASA (OB:FJORD), with a market cap of øre4.4b. 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, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I recommend you dig deeper yourself into FJORD here.

How does FJORD’s operating cash flow stack up against its debt?

Over the past year, FJORD has ramped up its debt from øre1.8b to øre2.2b – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at øre390m , ready to deploy into the business. Moreover, FJORD has generated øre921m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 41%, meaning that FJORD’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In FJORD’s case, it is able to generate 0.41x cash from its debt capital.

Can FJORD meet its short-term obligations with the cash in hand?

Looking at FJORD’s øre1.1b in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.54x.

Does FJORD face the risk of succumbing to its debt-load?

With total debt exceeding equities, FJORD is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In FJORD’s case, the ratio of 7.43x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as FJORD’s high interest coverage is seen as responsible and safe practice.

Next Steps:

FJORD’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. Though its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure FJORD has company-specific issues impacting its capital structure decisions. I recommend you continue to research Fjord1 to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for FJORD’s future growth? Take a look at our free research report of analyst consensus for FJORD’s outlook.

2. Valuation: What is FJORD 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 FJORD 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.