Yahoo Finance FDM Group (Holdings) PLC (LON:FDM): Time For A Financial Health Check
Zero-debt allows substantial financial flexibility, especially for small-cap companies like FDM Group (Holdings) PLC (LON:FDM), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean FDM has outstanding financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
View our latest analysis for FDM Group (Holdings)
Does FDM’s growth rate justify its decision for financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. FDM’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. A single-digit revenue growth of 6.5% for FDM is considerably low for a small-cap company. More capital can help the business grow faster. If FDM is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does FDM’s liquid assets cover its short-term commitments?
Since FDM Group (Holdings) doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. Looking at FDM’s most recent UK£31m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.23x. Usually, for IT 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.
Next Steps:
As a high-growth company, it may be beneficial for FDM to have some financial flexibility, hence zero-debt. Since there is also no concerns around FDM’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. I admit this is a fairly basic analysis for FDM’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research FDM Group (Holdings) to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for FDM’s future growth? Take a look at our free research report of analyst consensus for FDM’s outlook.
Valuation: What is FDM 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 FDM 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.
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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
