What Investors Should Know About Hydratec Industries NV’s (AMS:HYDRA) Financial Strength
Investors are always looking for growth in small-cap stocks like Hydratec Industries NV (AMS:HYDRA), with a market cap of €91.2m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into HYDRA here.
How much cash does HYDRA generate through its operations?
Over the past year, HYDRA has reduced its debt from €21.2m to €20.0m , which is made up of current and long term debt. With this debt payback, HYDRA currently has €4.5m remaining in cash and short-term investments for investing into the business. Moreover, HYDRA has generated cash from operations of €18.3m during the same period of time, leading to an operating cash to total debt ratio of 91.5%, meaning that HYDRA’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 HYDRA’s case, it is able to generate 0.91x cash from its debt capital.
Can HYDRA meet its short-term obligations with the cash in hand?
At the current liabilities level of €75.2m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.12x. For Industrials companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does HYDRA face the risk of succumbing to its debt-load?
With debt at 36.2% of equity, HYDRA may be thought of as appropriately levered. This range is considered safe as HYDRA is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if HYDRA’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 HYDRA, the ratio of 12.06x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving HYDRA ample headroom to grow its debt facilities.
Next Steps:
HYDRA’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how HYDRA has been performing in the past. I suggest you continue to research Hydratec Industries to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for HYDRA’s future growth? Take a look at our free research report of analyst consensus for HYDRA’s outlook.
Valuation: What is HYDRA 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 HYDRA 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.
