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What Does Huon Aquaculture Group Limited's (ASX:HUO) Balance Sheet Tell Us About It?

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While small-cap stocks, such as Huon Aquaculture Group Limited (ASX:HUO) with its market cap of AU$414m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into HUO here.

HUO’s Debt (And Cash Flows)

HUO's debt levels surged from AU$75m to AU$134m over the last 12 months – this includes long-term debt. With this growth in debt, HUO's cash and short-term investments stands at AU$4.5m to keep the business going. On top of this, HUO has generated AU$33m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 25%, meaning that HUO’s current level of operating cash is high enough to cover debt.

Can HUO meet its short-term obligations with the cash in hand?

At the current liabilities level of AU$86m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.39x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.

ASX:HUO Historical Debt, April 1st 2019
ASX:HUO Historical Debt, April 1st 2019

Can HUO service its debt comfortably?

With debt reaching 40% of equity, HUO may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In HUO's case, the ratio of 6.21x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

HUO’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 HUO'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 HUO has been performing in the past. I recommend you continue to research Huon Aquaculture Group to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for HUO’s future growth? Take a look at our free research report of analyst consensus for HUO’s outlook.

  2. Valuation: What is HUO 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 HUO is currently mispriced by the market.

  3. 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 editorial-team@simplywallst.com. 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.

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