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Herige (EPA:ALHRG) is a small-cap stock with a market capitalization of €79m. 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? Given that ALHRG is not presently profitable, it’s essential to understand the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into ALHRG here.
ALHRG’s Debt (And Cash Flows)
ALHRG's debt level has been constant at around €100m over the previous year including long-term debt. At this current level of debt, ALHRG currently has €32m remaining in cash and short-term investments , ready to be used for running the business. Moreover, ALHRG has generated €14m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 14%, meaning that ALHRG’s operating cash is less than its debt.
Does ALHRG’s liquid assets cover its short-term commitments?
At the current liabilities level of €158m, the company has been able to meet these commitments with a current assets level of €203m, leading to a 1.28x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Trade Distributors companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is ALHRG’s debt level acceptable?
With debt reaching 99% of equity, ALHRG may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since ALHRG is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
ALHRG’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 ALHRG'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 ALHRG has been performing in the past. I suggest you continue to research Herige to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALHRG’s future growth? Take a look at our free research report of analyst consensus for ALHRG’s outlook.
- Valuation: What is ALHRG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ALHRG is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.