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ÜSTRA Hannoversche Verkehrsbetriebe Aktiengesellschaft (FRA:HVB) is a small-cap stock with a market capitalization of €132m. 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? Since HVB is loss-making right now, it’s essential to understand 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. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into HVB here.
How does HVB’s operating cash flow stack up against its debt?
Over the past year, HVB has ramped up its debt from €5.1m to €30m , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at €73m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of HVB’s operating efficiency ratios such as ROA here.
Can HVB pay its short-term liabilities?
With current liabilities at €92m, the company has been able to meet these obligations given the level of current assets of €110m, with a current ratio of 1.2x. Generally, for Transportation companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is HVB’s debt level acceptable?
With total debt exceeding equities, HVB is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since HVB is presently 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.
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HVB’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around HVB’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how HVB has been performing in the past. You should continue to research ÜSTRA Hannoversche Verkehrsbetriebe to get a better picture of the small-cap by looking at: