What Investors Should Know About Harmonic Inc’s (NASDAQ:HLIT) Financial Strength
Harmonic Inc (NASDAQ:HLIT) is a small-cap stock with a market capitalization of US$473m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Communications industry, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into HLIT here.
Does HLIT produce enough cash relative to debt?
HLIT’s debt level has been constant at around US$128m over the previous year – this includes both the current and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$54m for investing into the business. On top of this, HLIT has produced US$4m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 2.9%, meaning that HLIT’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In HLIT’s case, it is able to generate 0.029x cash from its debt capital.
Does HLIT’s liquid assets cover its short-term commitments?
Looking at HLIT’s most recent US$139m liabilities, the company has been able to meet these commitments with a current assets level of US$179m, leading to a 1.29x current account ratio. For Communications companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does HLIT face the risk of succumbing to its debt-load?
HLIT is a relatively highly levered company with a debt-to-equity of 58%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since HLIT is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
HLIT’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, 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 HLIT’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Harmonic to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for HLIT’s future growth? Take a look at our free research report of analyst consensus for HLIT’s outlook.
Valuation: What is HLIT 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 HLIT 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 editorial-team@simplywallst.com.
