Investors are always looking for growth in small-cap stocks like Hawaiian Electric Industries, Inc. (NYSE:HE), with a market cap of US$4.5b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into HE here.
HE’s Debt (And Cash Flows)
Over the past year, HE has maintained its debt levels at around US$2.1b including long-term debt. At this current level of debt, HE currently has US$169m remaining in cash and short-term investments to keep the business going. Moreover, HE has produced cash from operations of US$499m over the same time period, resulting in an operating cash to total debt ratio of 24%, indicating that HE’s current level of operating cash is high enough to cover debt.
Can HE meet its short-term obligations with the cash in hand?
With current liabilities at US$4.2b, the company has been able to meet these obligations given the level of current assets of US$5.4b, with a current ratio of 1.27x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Electric Utilities companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can HE service its debt comfortably?
With debt reaching 94% of equity, HE 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. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In HE's case, the ratio of 3.61x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as HE’s high interest coverage is seen as responsible and safe practice.
Although HE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how HE has been performing in the past. You should continue to research Hawaiian Electric Industries to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HE’s future growth? Take a look at our free research report of analyst consensus for HE’s outlook.
- Valuation: What is HE 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 HE 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.
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