Yahoo Finance What You Must Know About Firstgroup plc’s (LON:FGP) Financial Strength
Investors are always looking for growth in small-cap stocks like Firstgroup plc (LON:FGP), with a market cap of UK£1.01b. However, an important fact which most ignore is: how financially healthy is the business? Given that FGP is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I suggest you dig deeper yourself into FGP here.
Does FGP produce enough cash relative to debt?
FGP has shrunken its total debt levels in the last twelve months, from UK£1.79b to UK£1.69b , which comprises of short- and long-term debt. With this debt repayment, FGP currently has UK£555.70m remaining in cash and short-term investments , ready to deploy into the business. Moreover, FGP has produced cash from operations of UK£636.90m over the same time period, leading to an operating cash to total debt ratio of 37.66%, signalling that FGP’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In FGP’s case, it is able to generate 0.38x cash from its debt capital.
Can FGP meet its short-term obligations with the cash in hand?
With current liabilities at UK£1.83b, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.84x, which is below the prudent industry ratio of 3x.
Is FGP’s debt level acceptable?
Since total debt levels have outpaced equities, FGP is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since FGP is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although FGP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for FGP’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Firstgroup to get a more holistic view 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.
