While small-cap stocks, such as Hexagon Composites ASA (OB:HEX) with its market cap of øre4.38b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into HEX here.
How does HEX’s operating cash flow stack up against its debt?
HEX’s debt levels have fallen from øre445.78m to øre386.90m over the last 12 months , which is made up of current and long term debt. With this reduction in debt, HEX’s cash and short-term investments stands at øre165.21m , ready to deploy into the business. Additionally, HEX has generated cash from operations of øre90.43m in the last twelve months, leading to an operating cash to total debt ratio of 23.37%, signalling that HEX’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HEX’s case, it is able to generate 0.23x cash from its debt capital.
Can HEX pay its short-term liabilities?
With current liabilities at øre387.05m, the company has been able to meet these commitments with a current assets level of øre652.06m, leading to a 1.68x current account ratio. For Machinery companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can HEX service its debt comfortably?
HEX’s level of debt is appropriate relative to its total equity, at 26.98%. HEX is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if HEX’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 HEX, the ratio of 33.69x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving HEX ample headroom to grow its debt facilities.
HEX’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. This is only a rough assessment of financial health, and I’m sure HEX has company-specific issues impacting its capital structure decisions. You should continue to research Hexagon Composites to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HEX’s future growth? Take a look at our free research report of analyst consensus for HEX’s outlook.
- Valuation: What is HEX 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 HEX 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 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.