What Investors Should Know About Haemonetics Corporation's (NYSE:HAE) Financial Strength
Investors are always looking for growth in small-cap stocks like Haemonetics Corporation (NYSE:HAE), with a market cap of US$4.5b. However, an important fact which most ignore is: how financially healthy is the business? 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. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into HAE here.
Does HAE Produce Much Cash Relative To Its Debt?
HAE has built up its total debt levels in the last twelve months, from US$270m to US$347m , which accounts for long term debt. With this growth in debt, HAE's cash and short-term investments stands at US$155m to keep the business going. On top of this, HAE has produced cash from operations of US$196m in the last twelve months, leading to an operating cash to total debt ratio of 57%, signalling that HAE’s current level of operating cash is high enough to cover debt.
Can HAE meet its short-term obligations with the cash in hand?
At the current liabilities level of US$211m, it seems that the business has been able to meet these obligations given the level of current assets of US$516m, with a current ratio of 2.44x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Medical Equipment companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does HAE face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 54%, HAE 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. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In HAE's case, the ratio of 21.91x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as HAE’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although HAE’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 HAE'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 HAE has company-specific issues impacting its capital structure decisions. I suggest you continue to research Haemonetics to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for HAE’s future growth? Take a look at our free research report of analyst consensus for HAE’s outlook.
Valuation: What is HAE 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 HAE 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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