Investors are always looking for growth in small-cap stocks like Fuling Global Inc. (NASDAQ:FORK), with a market cap of US$60m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Consumer Durables industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I suggest you dig deeper yourself into FORK here.
How does FORK’s operating cash flow stack up against its debt?
Over the past year, FORK has ramped up its debt from US$27m to US$44m – this includes long-term debt. With this growth in debt, FORK currently has US$3.8m remaining in cash and short-term investments , ready to deploy into the business. Moreover, FORK has generated US$1.7m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 3.9%, meaning that FORK’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FORK’s case, it is able to generate 0.039x cash from its debt capital.
Can FORK meet its short-term obligations with the cash in hand?
With current liabilities at US$54m, the company has been able to meet these obligations given the level of current assets of US$55m, with a current ratio of 1.01x. For Consumer Durables companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does FORK face the risk of succumbing to its debt-load?
With debt reaching 77% of equity, FORK may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether FORK 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 FORK’s, case, the ratio of 3.56x 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.
FORK’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how FORK has been performing in the past. I recommend you continue to research Fuling Global to get a better picture of the small-cap 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 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.
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