While small-cap stocks, such as HNI Corporation (NYSE:HNI) with its market cap of US$1.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into HNI here.
How much cash does HNI generate through its operations?
Over the past year, HNI has reduced its debt from US$312m to US$250m – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$46m , ready to deploy into the business. On top of this, HNI has generated cash from operations of US$191m over the same time period, leading to an operating cash to total debt ratio of 76%, meaning that HNI’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HNI’s case, it is able to generate 0.76x cash from its debt capital.
Can HNI meet its short-term obligations with the cash in hand?
Looking at HNI’s US$436m in current liabilities, the company has been able to meet these commitments with a current assets level of US$514m, leading to a 1.18x current account ratio. Generally, for Commercial Services companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does HNI face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 45%, HNI can be considered as an above-average leveraged company. 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 HNI’s case, the ratio of 12.75x 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.
HNI’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. 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 HNI has company-specific issues impacting its capital structure decisions. You should continue to research HNI to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HNI’s future growth? Take a look at our free research report of analyst consensus for HNI’s outlook.
- Valuation: What is HNI 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 HNI 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 email@example.com.