While small-cap stocks, such as FirstService Corporation (TSE:FSV) with its market cap of CA$4.2b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into FSV here.
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FSV’s Debt (And Cash Flows)
Over the past year, FSV has ramped up its debt from US$320m to US$486m – this includes long-term debt. With this growth in debt, FSV's cash and short-term investments stands at US$70m , ready to be used for running the business. On top of this, FSV has produced US$117m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 24%, meaning that FSV’s operating cash is sufficient to cover its debt.
Can FSV meet its short-term obligations with the cash in hand?
With current liabilities at US$244m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.71x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Real Estate companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does FSV face the risk of succumbing to its debt-load?
FSV is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether FSV is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In FSV's, case, the ratio of 10.07x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving FSV ample headroom to grow its debt facilities.
Although FSV’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. Since there is also no concerns around FSV's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how FSV has been performing in the past. I suggest you continue to research FirstService to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FSV’s future growth? Take a look at our free research report of analyst consensus for FSV’s outlook.
- Valuation: What is FSV 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 FSV 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.
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