While small-cap stocks, such as Freehill Mining Limited (ASX:FHS) with its market cap of AU$8.1m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that FHS is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. 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 suggest you dig deeper yourself into FHS here.
How much cash does FHS generate through its operations?
FHS’s debt levels surged from AU$1.3m to AU$4.5m over the last 12 months , which accounts for long term debt. With this growth in debt, FHS currently has AU$166k remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of FHS’s operating efficiency ratios such as ROA here.
Does FHS’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$5.5m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.21x.
Does FHS face the risk of succumbing to its debt-load?
FHS is a relatively highly levered company with a debt-to-equity of 70%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since FHS is currently 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.
FHS’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how FHS has been performing in the past. I recommend you continue to research Freehill Mining to get a more holistic view of the stock by looking at:
- Historical Performance: What has FHS’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 email@example.com.