FRP Holdings Inc (NASDAQ:FRPH) is a small-cap stock with a market capitalization of US$645.5m. 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into FRPH here.
Does FRPH produce enough cash relative to debt?
FRPH’s debt levels surged from US$38.4m to US$88.7m over the last 12 months , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$32.8m for investing 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 assess some of FRPH’s operating efficiency ratios such as ROA here.
Can FRPH pay its short-term liabilities?
Looking at FRPH’s most recent US$52.1m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 6.04x. Though, anything about 3x may be excessive, since FRPH may be leaving too much capital in low-earning investments.
Is FRPH’s debt level acceptable?
FRPH’s level of debt is appropriate relative to its total equity, at 23.0%. FRPH is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if FRPH’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 FRPH, the ratio of 2.09x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as FRPH’s low interest coverage already puts the company at higher risk of default.
FRPH’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how FRPH has been performing in the past. You should continue to research FRP Holdings to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FRPH’s future growth? Take a look at our free research report of analyst consensus for FRPH’s outlook.
- Valuation: What is FRPH 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 FRPH 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 email@example.com.