Are Franklin Covey Co’s (NYSE:FC) Interest Costs Too High?
Investors are always looking for growth in small-cap stocks like Franklin Covey Co (NYSE:FC), with a market cap of US$351.9m. However, an important fact which most ignore is: how financially healthy is the business? Given that FC is not presently profitable, it’s vital 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. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into FC here.
Does FC produce enough cash relative to debt?
Over the past year, FC has ramped up its debt from US$39.3m to US$51.8m – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$11.8m , ready to deploy into the business. Additionally, FC has generated cash from operations of US$14.3m during the same period of time, resulting in an operating cash to total debt ratio of 27.6%, signalling that FC’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In FC’s case, it is able to generate 0.28x cash from its debt capital.
Does FC’s liquid assets cover its short-term commitments?
At the current liabilities level of US$73.3m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$79.6m, leading to a 1.09x current account ratio. Generally, for Professional Services companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can FC service its debt comfortably?
With debt reaching 66.2% of equity, FC may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since FC is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
FC’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 FC has company-specific issues impacting its capital structure decisions. You should continue to research Franklin Covey to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for FC’s future growth? Take a look at our free research report of analyst consensus for FC’s outlook.
Valuation: What is FC 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 FC 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 editorial-team@simplywallst.com.
