Mid-caps stocks, like Hexcel Corporation (NYSE:HXL) with a market capitalization of US$5.97b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. HXL’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into HXL here.
How much cash does HXL generate through its operations?
Over the past year, HXL has ramped up its debt from US$821.6m to US$939.4m , which is made up of current and long term debt. With this increase in debt, HXL currently has US$39.1m remaining in cash and short-term investments for investing into the business. Moreover, HXL has generated cash from operations of US$403.5m during the same period of time, leading to an operating cash to total debt ratio of 43.0%, meaning that HXL’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 HXL’s case, it is able to generate 0.43x cash from its debt capital.
Can HXL meet its short-term obligations with the cash in hand?
At the current liabilities level of US$293.8m liabilities, the company has been able to meet these commitments with a current assets level of US$707.8m, leading to a 2.41x current account ratio. Generally, for Aerospace & Defense companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is HXL’s debt level acceptable?
HXL is a relatively highly levered company with a debt-to-equity of 67.1%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 HXL’s case, the ratio of 11.61x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although HXL’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. This is only a rough assessment of financial health, and I’m sure HXL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Hexcel to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HXL’s future growth? Take a look at our free research report of analyst consensus for HXL’s outlook.
- Valuation: What is HXL 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 HXL 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.