While small-cap stocks, such as Huon Aquaculture Group Limited (ASX:HUO) with its market cap of AU$404.4m, 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. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I suggest you dig deeper yourself into HUO here.
How much cash does HUO generate through its operations?
HUO has built up its total debt levels in the last twelve months, from AU$66.0m to AU$84.1m , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at AU$2.8m , ready to deploy into the business. Moreover, HUO has produced AU$57.9m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 68.9%, meaning that HUO’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 HUO’s case, it is able to generate 0.69x cash from its debt capital.
Does HUO’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$104.9m 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 2.13x. For Food companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does HUO face the risk of succumbing to its debt-load?
HUO’s level of debt is appropriate relative to its total equity, at 27.0%. HUO is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether HUO 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 HUO’s, case, the ratio of 9.35x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as HUO’s high interest coverage is seen as responsible and safe practice.
Next Steps:
HUO’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for HUO’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Huon Aquaculture Group to get a better picture of the stock by looking at: