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Farmer Bros. Co. (NASDAQ:FARM) is a small-cap stock with a market capitalization of US$435m. 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? Since FARM is loss-making right now, it’s vital to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into FARM here.
Does FARM produce enough cash relative to debt?
FARM has built up its total debt levels in the last twelve months, from US$31m to US$102m . With this growth in debt, FARM’s cash and short-term investments stands at US$5.5m for investing into the business. Moreover, FARM has produced US$2.8m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 2.8%, meaning that FARM’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In FARM’s case, it is able to generate 0.028x cash from its debt capital.
Can FARM pay its short-term liabilities?
With current liabilities at US$213m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.91x.
Can FARM service its debt comfortably?
With debt reaching 46% of equity, FARM may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since FARM is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although FARM’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. 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 FARM has company-specific issues impacting its capital structure decisions. I suggest you continue to research Farmer Bros to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FARM’s future growth? Take a look at our free research report of analyst consensus for FARM’s outlook.
- Historical Performance: What has FARM’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.
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 firstname.lastname@example.org.