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Investors are always looking for growth in small-cap stocks like Hillgrove Resources Limited (ASX:HGO), with a market cap of AU$49m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I recommend you dig deeper yourself into HGO here.
How does HGO’s operating cash flow stack up against its debt?
HGO’s debt levels have fallen from AU$20m to AU$6.9m over the last 12 months , which includes long-term debt. With this reduction in debt, HGO’s cash and short-term investments stands at AU$482k , ready to deploy into the business. Moreover, HGO has produced AU$3.6m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 53%, meaning that HGO’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HGO’s case, it is able to generate 0.53x cash from its debt capital.
Can HGO meet its short-term obligations with the cash in hand?
Looking at HGO’s AU$56m in current liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of AU$14m, leading to a current ratio of 0.26x.
Does HGO face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 24%, HGO’s debt level may be seen as prudent. This range is considered safe as HGO is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether HGO 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 HGO’s, case, the ratio of 26.36x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving HGO ample headroom to grow its debt facilities.
Next Steps:
HGO’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how HGO has been performing in the past. You should continue to research Hillgrove Resources to get a more holistic view of the stock by looking at: