Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as The Howard Hughes Corporation (NYSE:HHC), with a market cap of US$4.7b, often get neglected by retail investors. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. HHC’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into HHC here.
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HHC’s Debt (And Cash Flows)
HHC has built up its total debt levels in the last twelve months, from US$2.9b to US$3.3b , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$453m to keep the business going. Moreover, HHC has generated cash from operations of US$237m in the last twelve months, resulting in an operating cash to total debt ratio of 7.1%, indicating that HHC’s current level of operating cash is not high enough to cover debt.
Does HHC’s liquid assets cover its short-term commitments?
Looking at HHC’s US$629m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$1.0b, with a current ratio of 1.66x. The current ratio is calculated by dividing current assets by current liabilities. For Real Estate companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is HHC’s debt level acceptable?
With total debt exceeding equity, HHC is considered a highly levered company. This is not unusual for mid-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 HHC's case, the ratio of 1.98x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as HHC’s low interest coverage already puts the company at higher risk of default.
HHC’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. I admit this is a fairly basic analysis for HHC's financial health. Other important fundamentals need to be considered alongside. You should continue to research Howard Hughes to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HHC’s future growth? Take a look at our free research report of analyst consensus for HHC’s outlook.
- Valuation: What is HHC 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 HHC 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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