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How Financially Strong Is 1st Group Limited (ASX:1ST)?

1st Group Limited (ASX:1ST) is a small-cap stock with a market capitalization of AU$6m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Healthcare Services companies, in particular ones that run negative earnings, 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. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into 1ST here.

How does 1ST’s operating cash flow stack up against its debt?

Over the past year, 1ST has borrowed debt capital of around AU$965k made up of current and long term debt. With this growth in debt, 1ST currently has AU$277k remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 1ST’s operating efficiency ratios such as ROA here.

Does 1ST’s liquid assets cover its short-term commitments?

With current liabilities at AU$1m, the company has been able to meet these commitments with a current assets level of AU$1m, leading to a 1.03x current account ratio. Generally, for Healthcare Services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

ASX:1ST Historical Debt October 24th 18
ASX:1ST Historical Debt October 24th 18

Can 1ST service its debt comfortably?

With a debt-to-equity ratio of 36%, 1ST’s debt level may be seen as prudent. 1ST is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for 1ST, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

1ST’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 1ST’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research 1st Group to get a more holistic view of the stock by looking at:

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  1. Historical Performance: What has 1ST’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.

  2. 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.