While small-cap stocks, such as Feronia Inc (TSXV:FRN) with its market cap of CA$145.11M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since FRN is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I recommend you dig deeper yourself into FRN here.
How does FRN’s operating cash flow stack up against its debt?
FRN has built up its total debt levels in the last twelve months, from US$23.97M to US$55.93M , which comprises of short- and long-term debt. With this rise in debt, FRN’s cash and short-term investments stands at US$17.14M , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of FRN’s operating efficiency ratios such as ROA here.
Does FRN’s liquid assets cover its short-term commitments?
At the current liabilities level of US$65.06M liabilities, it seems that the business is not able to meet these obligations given the level of current assets of US$26.18M, with a current ratio of 0.4x below the prudent level of 3x.
Is FRN’s debt level acceptable?
With total debt exceeding equities, FRN is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since FRN is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
With a high level of debt on its balance sheet, FRN could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for FRN to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how FRN has been performing in the past. You should continue to research Feronia to get a more holistic view of the stock by looking at:
- Historical Performance: What has FRN’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 pass 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.