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Investors are always looking for growth in small-cap stocks like FERRO S.A. (WSE:FRO), with a market cap of zł291m. 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. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into FRO here.
Does FRO Produce Much Cash Relative To Its Debt?
Over the past year, FRO has ramped up its debt from zł67m to zł109m , which includes long-term debt. With this growth in debt, FRO currently has zł18m remaining in cash and short-term investments , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of FRO’s operating efficiency ratios such as ROA here.
Can FRO pay its short-term liabilities?
Looking at FRO’s zł119m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of zł194m, leading to a 1.63x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Building companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is FRO’s debt level acceptable?
With debt reaching 47% of equity, FRO 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. We can check to see whether FRO 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 FRO's, case, the ratio of 15.71x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving FRO ample headroom to grow its debt facilities.
Although FRO’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around FRO's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for FRO's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research FERRO to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FRO’s future growth? Take a look at our free research report of analyst consensus for FRO’s outlook.
- Valuation: What is FRO 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 FRO 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 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.