Investors are always looking for growth in small-cap stocks like The Hackett Group Inc (NASDAQ:HCKT), with a market cap of US$477.31M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the IT industry, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into HCKT here.
Does HCKT generate enough cash through operations?
Over the past year, HCKT has ramped up its debt from US$7.00M to US$19.00M – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$17.51M , ready to deploy into the business. On top of this, HCKT has generated cash from operations of US$26.51M in the last twelve months, resulting in an operating cash to total debt ratio of 139.52%, signalling that HCKT’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HCKT’s case, it is able to generate 1.4x cash from its debt capital.
Can HCKT meet its short-term obligations with the cash in hand?
At the current liabilities level of US$51.45M 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 1.46x. Usually, for IT companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is HCKT’s debt level acceptable?
With debt at 16.47% of equity, HCKT may be thought of as appropriately levered. HCKT is not taking on too much debt commitment, which may be constraining for future growth. We can test if HCKT’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 HCKT, the ratio of 54.6x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as HCKT’s high interest coverage is seen as responsible and safe practice.
HCKT’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how HCKT has been performing in the past. I suggest you continue to research Hackett Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HCKT’s future growth? Take a look at our free research report of analyst consensus for HCKT’s outlook.
- Valuation: What is HCKT 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 HCKT 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 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.