What You Should Know About FIH group plc's (LON:FIH) Financial Strength
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Investors are always looking for growth in small-cap stocks like FIH group plc (LON:FIH), with a market cap of UK£40m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health 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. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into FIH here.
FIH’s Debt (And Cash Flows)
FIH's debt levels surged from UK£8.5m to UK£18m over the last 12 months , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at UK£6.2m , ready to be used for running the business. Additionally, FIH has generated cash from operations of UK£3.1m over the same time period, leading to an operating cash to total debt ratio of 17%, indicating that FIH’s debt is not covered by operating cash.
Does FIH’s liquid assets cover its short-term commitments?
At the current liabilities level of UK£21m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.99x. The current ratio is the number you get when you divide current assets by current liabilities.
Does FIH face the risk of succumbing to its debt-load?
FIH is a relatively highly levered company with a debt-to-equity of 40%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In FIH's case, the ratio of 15.03x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving FIH ample headroom to grow its debt facilities.
Next Steps:
FIH’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven't considered other factors such as how FIH has been performing in the past. I suggest you continue to research FIH group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for FIH’s future growth? Take a look at our free research report of analyst consensus for FIH’s outlook.
Historical Performance: What has FIH'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.
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.
