Hunting plc (LSE:HTG) is a small-cap stock with a market capitalization of £965.56M. 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? Energy Services companies, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into HTG here.
Does HTG generate an acceptable amount of cash through operations?
HTG has shrunken its total debt levels in the last twelve months, from $169.5M to $66.2M , which comprises of short- and long-term debt. With this reduction in debt, HTG currently has $64.3M remaining in cash and short-term investments , ready to deploy into the business. Moreover, HTG has produced $44.8M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 67.67%, signalling that HTG’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In HTG’s case, it is able to generate 0.68x cash from its debt capital.
Does HTG’s liquid assets cover its short-term commitments?
With current liabilities at $136.2M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.38x. Though, a ratio greater than 3x may be considered as too high, as HTG could be holding too much capital in a low-return investment environment.
Is HTG’s level of debt at an acceptable level?
HTG’s level of debt is low relative to its total equity, at 2.39%. HTG is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. HTG’s risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.
Are you a shareholder? HTG has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. In the future, its financial position may change. I recommend researching market expectations for HTG’s future growth on our free analysis platform.
Are you a potential investor? HTG’s high cash coverage and low levels of debt indicate its ability to use its borrowings efficiently in order to produce a healthy cash flow. Furthermore, its high liquidity means the company should continue to operate smoothly in the case of adverse events. To gain more conviction in the stock, you need to also examine HTG’s track record. You should continue your analysis by taking a look at HTG’s past performance analysis on our free platform to figure out HTG’s financial health position.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.