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Is Fossil Group, Inc.’s (NASDAQ:FOSL) Balance Sheet A Threat To Its Future?

Sam Bishop

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Fossil Group, Inc. (NASDAQ:FOSL) is a small-cap stock with a market capitalization of US$785m. 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? Since FOSL is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into FOSL here.

Does FOSL produce enough cash relative to debt?

FOSL has shrunken its total debt levels in the last twelve months, from US$485m to US$397m , which includes long-term debt. With this debt repayment, FOSL’s cash and short-term investments stands at US$236m for investing into the business. Moreover, FOSL has generated cash from operations of US$192m over the same time period, leading to an operating cash to total debt ratio of 48%, signalling that FOSL’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In FOSL’s case, it is able to generate 0.48x cash from its debt capital.

Can FOSL meet its short-term obligations with the cash in hand?

Looking at FOSL’s US$571m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.01x. Generally, for Luxury companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

NASDAQGS:FOSL Historical Debt February 12th 19

Can FOSL service its debt comfortably?

With debt reaching 75% of equity, FOSL may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since FOSL is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

Although FOSL’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure FOSL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Fossil Group to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for FOSL’s future growth? Take a look at our free research report of analyst consensus for FOSL’s outlook.
  2. Valuation: What is FOSL 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 FOSL 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.