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Are Five Point Holdings LLC’s (NYSE:FPH) Interest Costs Too High?

Five Point Holdings LLC (NYSE:FPH) is a small-cap stock with a market capitalization of US$1.1b. 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? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into FPH here.

Does FPH produce enough cash relative to debt?

FPH has built up its total debt levels in the last twelve months, from US$172m to US$659m , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$679m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. 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 FPH’s operating efficiency ratios such as ROA here.

Does FPH’s liquid assets cover its short-term commitments?

At the current liabilities level of US$177m liabilities, the company has been able to meet these commitments with a current assets level of US$2.3b, leading to a 12.85x current account ratio. However, anything above 3x may be considered excessive by some investors. They might argue FPH is leaving too much capital in low-earning investments.

NYSE:FPH Historical Debt November 13th 18

Can FPH service its debt comfortably?

FPH’s level of debt is appropriate relative to its total equity, at 35%. This range is considered safe as FPH is not taking on too much debt obligation, which may be constraining for future growth. We can test if FPH’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 FPH, the ratio of 11.48x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

FPH’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. I admit this is a fairly basic analysis for FPH’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Five Point Holdings to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for FPH’s future growth? Take a look at our free research report of analyst consensus for FPH’s outlook.
  2. Valuation: What is FPH 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 FPH is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com.