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Hamilton Beach Brands Holding Company (NYSE:HBB) is a small-cap stock with a market capitalization of US$255m. 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? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into HBB here.
Does HBB Produce Much Cash Relative To Its Debt?
HBB's debt levels surged from US$86m to US$94m over the last 12 months , which includes long-term debt. With this growth in debt, HBB's cash and short-term investments stands at US$2.0m , ready to be used for running the business. Additionally, HBB has produced cash from operations of US$823k during the same period of time, leading to an operating cash to total debt ratio of 0.9%, indicating that HBB’s debt is not covered by operating cash.
Can HBB pay its short-term liabilities?
With current liabilities at US$188m, it seems that the business has been able to meet these commitments with a current assets level of US$253m, leading to a 1.35x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Consumer Durables companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Can HBB service its debt comfortably?
Since total debt levels exceed equity, HBB is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether HBB 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 HBB's, case, the ratio of 8.8x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as HBB’s high interest coverage is seen as responsible and safe practice.
Although HBB’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around HBB's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for HBB's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Hamilton Beach Brands Holding to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HBB’s future growth? Take a look at our free research report of analyst consensus for HBB’s outlook.
- Historical Performance: What has HBB's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.