Yahoo Finance Firstgroup plc (LON:FGP): Time For A Financial Health Check
While small-cap stocks, such as Firstgroup plc (LSE:FGP) with its market cap of UK£1.34B, 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into FGP here.
Does FGP generate enough cash through operations?
FGP has sustained its debt level by about UK£1.79B over the last 12 months comprising of short- and long-term debt. At this constant level of debt, FGP currently has UK£401.30M remaining in cash and short-term investments , ready to deploy into the business. Moreover, FGP has generated UK£520.40M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 29.06%, indicating that FGP’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In FGP’s case, it is able to generate 0.29x cash from its debt capital.
Can FGP pay its short-term liabilities?
At the current liabilities level of UK£1.41B liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.89x, which is below the prudent industry ratio of 3x.
Can FGP service its debt comfortably?
With debt reaching 88.37% of equity, FGP 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 FGP 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 FGP’s, case, the ratio of 2.01x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
FGP’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure FGP has company-specific issues impacting its capital structure decisions. I suggest you continue to research Firstgroup to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for FGP’s future growth? Take a look at our free research report of analyst consensus for FGP’s outlook.
Valuation: What is FGP 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 FGP 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 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.
