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F-Secure Oyj (OTCPK:FSOY.F) is a small-cap stock with a market capitalization of US$421m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis 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. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into FSOY.F here.
FSOY.F’s Debt (And Cash Flows)
Over the past year, FSOY.F has borrowed debt capital of around €37m accounting for long term debt. With this ramp up in debt, the current cash and short-term investment levels stands at €28m to keep the business going. Moreover, FSOY.F has produced €6.8m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 18%, indicating that FSOY.F’s current level of operating cash is not high enough to cover debt.
Can FSOY.F pay its short-term liabilities?
Looking at FSOY.F’s €92m in current liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of €89m, leading to a current ratio of 0.97x. The current ratio is the number you get when you divide current assets by current liabilities.
Does FSOY.F face the risk of succumbing to its debt-load?
With debt reaching 56% of equity, FSOY.F may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if FSOY.F’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For FSOY.F, the ratio of 15.29x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving FSOY.F ample headroom to grow its debt facilities.
FSOY.F’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. This is only a rough assessment of financial health, and I’m sure FSOY.F has company-specific issues impacting its capital structure decisions. I recommend you continue to research F-Secure Oyj to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FSOY.F’s future growth? Take a look at our free research report of analyst consensus for FSOY.F’s outlook.
- Valuation: What is FSOY.F 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 FSOY.F 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 firstname.lastname@example.org. 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.