While small-cap stocks, such as Hallador Energy Company (NASDAQ:HNRG) with its market cap of US$159m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into HNRG here.
How much cash does HNRG generate through its operations?
HNRG has shrunken its total debt levels in the last twelve months, from US$207m to US$192m – this includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$19m for investing into the business. Additionally, HNRG has generated cash from operations of US$44m in the last twelve months, resulting in an operating cash to total debt ratio of 23%, indicating that HNRG’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HNRG’s case, it is able to generate 0.23x cash from its debt capital.
Does HNRG’s liquid assets cover its short-term commitments?
Looking at HNRG’s US$50m in current liabilities, the company has been able to meet these commitments with a current assets level of US$97m, leading to a 1.93x current account ratio. For Oil and Gas companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is HNRG’s debt level acceptable?
With debt reaching 75% of equity, HNRG may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In HNRG’s case, the ratio of 1.61x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as HNRG’s low interest coverage already puts the company at higher risk of default.
HNRG’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 HNRG’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure HNRG has company-specific issues impacting its capital structure decisions. I suggest you continue to research Hallador Energy to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HNRG’s future growth? Take a look at our free research report of analyst consensus for HNRG’s outlook.
- Valuation: What is HNRG 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 HNRG 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.