Investors are always looking for growth in small-cap stocks like Hubtown Limited (NSEI:HUBTOWN), with a market cap of ₹9.43B. However, an important fact which most ignore is: how financially healthy is the business? Since HUBTOWN is loss-making right now, it’s essential to evaluate 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, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into HUBTOWN here.
How does HUBTOWN’s operating cash flow stack up against its debt?
HUBTOWN’s debt levels surged from ₹16,440.0M to ₹18,166.7M over the last 12 months – this includes both the current and long-term debt. With this rise in debt, HUBTOWN currently has ₹131.6M remaining in cash and short-term investments for investing into the business. On top of this, HUBTOWN has produced cash from operations of ₹50.9M over the same time period, resulting in an operating cash to total debt ratio of 0.28%, meaning that HUBTOWN’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In HUBTOWN’s case, it is able to generate 0x cash from its debt capital.
Can HUBTOWN meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹27,360.3M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.03x. Usually, for real estate 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.
Can HUBTOWN service its debt comfortably?
Since total debt levels have outpaced equities, HUBTOWN is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since HUBTOWN 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:
Are you a shareholder? HUBTOWN’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that HUBTOWN’s financial situation may change. I suggest keeping abreast of market expectations for HUBTOWN’s future growth on our free analysis platform.