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Investors are always looking for growth in small-cap stocks like Harmonic Inc. (NASDAQ:HLIT), with a market cap of US$480m. However, an important fact which most ignore is: how financially healthy is the business? Given that HLIT is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I recommend you dig deeper yourself into HLIT here.
HLIT’s Debt (And Cash Flows)
Over the past year, HLIT has ramped up its debt from US$133m to US$163m , which accounts for long term debt. With this rise in debt, HLIT's cash and short-term investments stands at US$70m to keep the business going. Additionally, HLIT has generated cash from operations of US$23m in the last twelve months, leading to an operating cash to total debt ratio of 14%, meaning that HLIT’s debt is not covered by operating cash.
Does HLIT’s liquid assets cover its short-term commitments?
At the current liabilities level of US$134m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.35x. The current ratio is the number you get when you divide current assets by current liabilities. For Communications companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Can HLIT service its debt comfortably?
With debt reaching 74% of equity, HLIT may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since HLIT is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
HLIT’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 HLIT'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 HLIT has been performing in the past. I recommend you continue to research Harmonic to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HLIT’s future growth? Take a look at our free research report of analyst consensus for HLIT’s outlook.
- Valuation: What is HLIT 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 HLIT 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.