Is Frontier Communications Corporation (NASDAQ:FTR) A Financially Sound Company?
Frontier Communications Corporation (NASDAQ:FTR) is a small-cap stock with a market capitalization of US$635.16M. 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? Telecom businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into FTR here.
Does FTR generate an acceptable amount of cash through operations?
FTR has sustained its debt level by about US$17.63B over the last 12 months – this includes both the current and long-term debt. At this constant level of debt, FTR’s cash and short-term investments stands at US$362.00M for investing into the business. On top of this, FTR has generated US$1.85B in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 10.50%, signalling that FTR’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In FTR’s case, it is able to generate 0.1x cash from its debt capital.
Can FTR meet its short-term obligations with the cash in hand?
At the current liabilities level of US$2.51B liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.53x, which is below the prudent industry ratio of 3x.
Is FTR’s debt level acceptable?
Since total debt levels have outpaced equities, FTR is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since FTR 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:
With a high level of debt on its balance sheet, FTR could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for FTR to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure FTR has company-specific issues impacting its capital structure decisions. I recommend you continue to research Frontier Communications to get a more holistic view of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for FTR’s future growth? Take a look at our free research report of analyst consensus for FTR’s outlook.
2. Valuation: What is FTR 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 FTR 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 pass 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.
