First Business Financial Services Inc (NASDAQ:FBIZ) is a small cap stock with a market capitalisation of USD $203.49M. As a company operating in the financial services sector, it faces the risk of bad loans, also formally known as credit risk. As a small bank, First Business Financial Services’s profits are directly affected by macroeconomic events as the ability for borrowers to repay their debt depends on the stability of their salary and interest rate levels. Bad debt is directly written off as an expense which impacts First Business Financial Services’s bottom line and shareholders’ value. Today we will analyse First Business Financial Services’s level of bad debt and liabilities in order to understand the risk involved with investing in First Business Financial Services Check out our latest analysis for First Business Financial Services
Does First Business Financial Services Understand Its Own Risks?
First Business Financial Services’s ability to forecast and provision for its bad loans relatively accurately indicates it has a good understanding of the level of risk it is taking on. If it writes off more than 100% of the bad debt it provisioned for, then it has poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does First Business Financial Services understand its own risk?. With a bad loan to bad debt ratio of 59.95%, First Business Financial Services has under-provisioned by -40.05% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
What Is An Appropriate Level Of Risk?
First Business Financial Services is engaging in risking lending practices if it is over-exposed to bad debt. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of First Business Financial Services’s profit. With a ratio of 2.26%, the bank faces an appropriate level of bad loan, indicating prudent management and an industry-average risk of default.
How Big Is First Business Financial Services’s Safety Net?
First Business Financial Services makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. First Business Financial Services’s total deposit level of 87.94% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.
Keep in mind that a stock investment requires research on more than just its operational side. There are three important aspects you should further research:
1. Future Outlook: What are well-informed industry analysts predicting for FBIZ’s future growth? Take a look at our free research report of analyst consensus for FBIZ’s outlook.
2. Valuation: What is FBIZ worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether FBIZ 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.