What does FutureFuel Corp’s (NYSE:FF) Balance Sheet Tell Us About Its Future?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like FutureFuel Corp (NYSE:FF), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean FF has outstanding financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
See our latest analysis for FutureFuel
Is FF right in choosing financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either FF does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. FF’s revenue growth in the teens of 14% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If FF is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does FF’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, FutureFuel has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. With current liabilities at US$53m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 6.86x. Having said that, anything above 3x may be considered excessive by some investors. They might argue FF is leaving too much capital in low-earning investments.
Next Steps:
As a high-growth company, it may be beneficial for FF to have some financial flexibility, hence zero-debt. Since there is also no concerns around FF’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. I admit this is a fairly basic analysis for FF’s financial health. Other important fundamentals need to be considered alongside. You should continue to research FutureFuel to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for FF’s future growth? Take a look at our free research report of analyst consensus for FF’s outlook.
Valuation: What is FF 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 FF 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.
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.
