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While small-cap stocks, such as Aerohive Networks, Inc. (NYSE:HIVE) with its market cap of US$249m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that HIVE is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into HIVE here.
Does HIVE Produce Much Cash Relative To Its Debt?
HIVE has sustained its debt level by about US$20m over the last 12 months which accounts for long term debt. At this stable level of debt, HIVE currently has US$92m remaining in cash and short-term investments , ready to be used for running the business. On top of this, HIVE has generated US$13m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 64%, signalling that HIVE’s current level of operating cash is high enough to cover debt.
Does HIVE’s liquid assets cover its short-term commitments?
Looking at HIVE’s US$84m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$131m, with a current ratio of 1.56x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Communications companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is HIVE’s debt level acceptable?
With total debt exceeding equity, HIVE is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since HIVE is presently loss-making, 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.
HIVE’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around HIVE's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for HIVE's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Aerohive Networks to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HIVE’s future growth? Take a look at our free research report of analyst consensus for HIVE’s outlook.
- Valuation: What is HIVE 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 HIVE 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 firstname.lastname@example.org. 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.