While small-cap stocks, such as HNI Corporation (NYSE:HNI) with its market cap of US$1.6b, 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 essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. 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’d encourage you to dig deeper yourself into HNI here.
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HNI’s Debt (And Cash Flows)
HNI has built up its total debt levels in the last twelve months, from US$329m to US$378m , which accounts for long term debt. With this increase in debt, HNI's cash and short-term investments stands at US$50m to keep the business going. Additionally, HNI has produced cash from operations of US$189m during the same period of time, resulting in an operating cash to total debt ratio of 50%, meaning that HNI’s debt is appropriately covered by operating cash.
Can HNI meet its short-term obligations with the cash in hand?
Looking at HNI’s US$373m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$484m, leading to a 1.3x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. 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 69%, HNI can be considered as an above-average leveraged company. 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 HNI 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 HNI's, case, the ratio of 15.38x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving HNI ample headroom to grow its debt facilities.
Although HNI’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. Since there is also no concerns around HNI'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 HNI has been performing in the past. I suggest you continue to research HNI to get a better picture 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.
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