While small-cap stocks, such as Houston Wire & Cable Company (NASDAQ:HWCC) with its market cap of US$143.39m, 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. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into HWCC here.
How much cash does HWCC generate through its operations?
Over the past year, HWCC has ramped up its debt from US$63.57m to US$76.58m , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$0 , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of HWCC’s operating efficiency ratios such as ROA here.
Does HWCC’s liquid assets cover its short-term commitments?
At the current liabilities level of US$28.30m liabilities, the company has been able to meet these commitments with a current assets level of US$147.90m, leading to a 5.23x current account ratio. Though, anything about 3x may be excessive, since HWCC may be leaving too much capital in low-earning investments.
Can HWCC service its debt comfortably?
With debt reaching 89.84% of equity, HWCC may be thought of as relatively highly levered. This is not uncommon for a small-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 HWCC’s case, the ratio of 3.58x suggests that interest is appropriately 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.
HWCC’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for HWCC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Houston Wire & Cable to get a more holistic view of the stock by looking at:
- Historical Performance: What has HWCC’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 pass 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.