While small-cap stocks, such as Hyster-Yale Materials Handling Inc (NYSE:HY) with its market cap of US$1.10b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into HY here.
Does HY produce enough cash relative to debt?
HY’s debt levels have fallen from US$300.6m to US$273.1m over the last 12 months , which is made up of current and long term debt. With this reduction in debt, HY’s cash and short-term investments stands at US$153.3m for investing into the business. Additionally, HY has produced cash from operations of US$76.4m in the last twelve months, resulting in an operating cash to total debt ratio of 28.0%, indicating that HY’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HY’s case, it is able to generate 0.28x cash from its debt capital.
Can HY meet its short-term obligations with the cash in hand?
With current liabilities at US$730.4m, it appears that the company has been able to meet these commitments with a current assets level of US$1.10b, leading to a 1.51x current account ratio. Generally, for Machinery companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does HY face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 46.3%, HY can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if HY’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For HY, the ratio of 4.22x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as HY’s high interest coverage is seen as responsible and safe practice.
HY’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. Since there is also no concerns around HY’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure HY has company-specific issues impacting its capital structure decisions. I recommend you continue to research Hyster-Yale Materials Handling to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HY’s future growth? Take a look at our free research report of analyst consensus for HY’s outlook.
- Valuation: What is HY 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 HY 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 firstname.lastname@example.org.