Investors are always looking for growth in small-cap stocks like Halcón Resources Corporation (NYSE:HK), with a market cap of US$670.85m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into HK here.
Does HK produce enough cash relative to debt?
HK has shrunken its total debt levels in the last twelve months, from US$964.65m to US$409.17m , which comprises of short- and long-term debt. With this debt repayment, HK currently has US$424.07m remaining in cash and short-term investments , ready to deploy into the business. Moreover, HK has produced cash from operations of US$114.59m over the same time period, resulting in an operating cash to total debt ratio of 28.01%, signalling that HK’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HK’s case, it is able to generate 0.28x cash from its debt capital.
Can HK meet its short-term obligations with the cash in hand?
Looking at HK’s most recent US$150.34m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$471.79m, with a current ratio of 3.14x. Though, anything about 3x may be excessive, since HK may be leaving too much capital in low-earning investments.
Is HK’s debt level acceptable?
With a debt-to-equity ratio of 53.96%, HK can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
HK’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 HK’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 HK has been performing in the past. I suggest you continue to research Halcón Resources to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HK’s future growth? Take a look at our free research report of analyst consensus for HK’s outlook.
- Historical Performance: What has HK’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.
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.