Investors are always looking for growth in small-cap stocks like Finning International Inc. (TSE:FTT), with a market cap of CA$4.0b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into FTT here.
FTT’s Debt (And Cash Flows)
Over the past year, FTT has ramped up its debt from CA$1.3b to CA$1.5b , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at CA$454m to keep the business going. Additionally, FTT has produced CA$260m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 17%, indicating that FTT’s debt is not covered by operating cash.
Does FTT’s liquid assets cover its short-term commitments?
Looking at FTT’s CA$2.0b in current 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 1.97x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Trade Distributors companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can FTT service its debt comfortably?
FTT is a relatively highly levered company with a debt-to-equity of 73%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether FTT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In FTT's, case, the ratio of 6.51x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as FTT’s high interest coverage is seen as responsible and safe practice.
Although FTT’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around FTT's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure FTT has company-specific issues impacting its capital structure decisions. I suggest you continue to research Finning International to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FTT’s future growth? Take a look at our free research report of analyst consensus for FTT’s outlook.
- Valuation: What is FTT 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 FTT 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.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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.