While small-cap stocks, such as Fuling Global Inc (NASDAQ:FORK) with its market cap of US$42.61m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes vital. 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 recommend you dig deeper yourself into FORK here.
How does FORK’s operating cash flow stack up against its debt?
FORK has built up its total debt levels in the last twelve months, from US$24.79m to US$0 – 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$4.23m , ready to deploy into the business. On top of this, FORK has generated US$2.47m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 6.09%, signalling that FORK’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In FORK’s case, it is able to generate 0.061x cash from its debt capital.
Can FORK meet its short-term obligations with the cash in hand?
With current liabilities at US$55.56m, it appears that the company has been able to meet these commitments with a current assets level of US$57.01m, leading to a 1.03x current account ratio. Usually, for Consumer Durables companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is FORK’s debt level acceptable?
With debt reaching 70.11% of equity, FORK 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. We can test if FORK’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 FORK, the ratio of 6.86x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving FORK ample headroom to grow its debt facilities.
At its current level of cash flow coverage, FORK has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how FORK has been performing in the past. I suggest you continue to research Fuling Global to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FORK’s future growth? Take a look at our free research report of analyst consensus for FORK’s outlook.
- Historical Performance: What has FORK’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 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.