HC2 Holdings Inc (NYSE:HCHC) is a small-cap stock with a market capitalization of USD $223.66M. 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. There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. View our latest analysis for HC2 Holdings
Does HCHC generate an acceptable amount of cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These adverse events bring devastation and yet does not absolve the company from its debt. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. HCHC’s recent operating cash flow was 0.1 times its debt within the past year. A ratio of over 0.1x shows that HCHC is generating adequate cash from its core business, which should increase its potential to pay back near-term debt.
Can HCHC pay its short-term liabilities?
What about its other commitments such as payments to suppliers and salaries to its employees? During times of unfavourable events, HCHC could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for HCHC’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that HCHC is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Does HCHC face the risk of succumbing to its debt-load?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. HCHC’s debt-to-equity ratio exceeds 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate. We can test if HCHC’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. In HCHC’s case, its interest is not sufficiently covered by its profits as the ratio is 0.16x. Debtors may be less inclined to loan the company more money, giving HCHC less headroom for growth through debt.