Hillenbrand, Inc. (NYSE:HI) is a small-cap stock with a market capitalization of US$2.6b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company's financial health becomes vital, as mismanagement of capital can lead to 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. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into HI here.
Does HI Produce Much Cash Relative To Its Debt?
HI's debt levels have fallen from US$481m to US$365m over the last 12 months , which also accounts for long term debt. With this reduction in debt, HI currently has US$65m remaining in cash and short-term investments to keep the business going. On top of this, HI has generated cash from operations of US$257m over the same time period, resulting in an operating cash to total debt ratio of 70%, meaning that HI’s operating cash is sufficient to cover its debt.
Does HI’s liquid assets cover its short-term commitments?
At the current liabilities level of US$511m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.2x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can HI service its debt comfortably?
HI is a relatively highly levered company with a debt-to-equity of 49%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether HI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In HI's, case, the ratio of 10.51x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving HI ample headroom to grow its debt facilities.
Although HI’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 HI has company-specific issues impacting its capital structure decisions. I suggest you continue to research Hillenbrand to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HI’s future growth? Take a look at our free research report of analyst consensus for HI’s outlook.
- Valuation: What is HI 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 HI 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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