First Derivatives plc (LON:FDP) is a small-cap stock with a market capitalization of UK£844m. 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? Companies operating in the IT industry, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into FDP here.
How much cash does FDP generate through its operations?
Over the past year, FDP has maintained its debt levels at around UK£29m made up of current and long term debt. At this stable level of debt, FDP currently has UK£12m remaining in cash and short-term investments for investing into the business. Additionally, FDP has generated UK£20m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 69%, meaning that FDP’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FDP’s case, it is able to generate 0.69x cash from its debt capital.
Can FDP meet its short-term obligations with the cash in hand?
At the current liabilities level of UK£49m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.34x. Usually, for IT companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does FDP face the risk of succumbing to its debt-load?
With debt at 21% of equity, FDP may be thought of as appropriately levered. This range is considered safe as FDP is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether FDP 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 FDP’s, case, the ratio of 16.13x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as FDP’s high interest coverage is seen as responsible and safe practice.
FDP’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure FDP has company-specific issues impacting its capital structure decisions. You should continue to research First Derivatives to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FDP’s future growth? Take a look at our free research report of analyst consensus for FDP’s outlook.
- Valuation: What is FDP 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 FDP 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.
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