Höegh LNG Partners LP (NYSE:HMLP) is a small-cap stock with a market capitalization of US$630.2m. 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? Oil and Gas companies, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into HMLP here.
How much cash does HMLP generate through its operations?
HMLP’s debt levels have fallen from US$566.0m to US$503.6m over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$22.0m for investing into the business. Additionally, HMLP has produced cash from operations of US$82.4m during the same period of time, resulting in an operating cash to total debt ratio of 16.4%, indicating that HMLP’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HMLP’s case, it is able to generate 0.16x cash from its debt capital.
Can HMLP pay its short-term liabilities?
At the current liabilities level of US$57.0m liabilities, it appears that the company is not able to meet these obligations given the level of current assets of US$43.3m, with a current ratio of 0.76x below the prudent level of 3x.
Does HMLP face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 99.1%, HMLP can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if HMLP’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For HMLP, the ratio of 3.59x 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.
HMLP’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure HMLP has company-specific issues impacting its capital structure decisions. I recommend you continue to research Höegh LNG Partners to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HMLP’s future growth? Take a look at our free research report of analyst consensus for HMLP’s outlook.
- Valuation: What is HMLP 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 HMLP 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.
To help readers see past 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.
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