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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as HealthEquity, Inc. (NASDAQ:HQY), with a market capitalization of US$4.5b, rarely draw their attention from the investing community. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. HQY’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into HQY here.
Does HQY face the risk of succumbing to its debt-load?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. Generally, mid-cap stocks are considered financially healthy if its ratio is below 40%. The good news for investors is that HealthEquity has no debt. This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with HQY, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Does HQY’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, HealthEquity has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. With current liabilities at US$23m, it appears that the company has been able to meet these obligations given the level of current assets of US$365m, with a current ratio of 15.59x. The current ratio is calculated by dividing current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
HQY has zero-debt in addition to ample cash to cover its short-term commitments. Its safe operations reduces risk for the company and its investors, however, some degree of debt could also ramp up earnings growth and operational efficiency. Keep in mind I haven't considered other factors such as how HQY has performed in the past. You should continue to research HealthEquity to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HQY’s future growth? Take a look at our free research report of analyst consensus for HQY’s outlook.
- Valuation: What is HQY 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 HQY 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.