Investors are always looking for growth in small-cap stocks like HF Foods Group Inc. (NASDAQ:HFFG), with a market cap of US$305m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into HFFG here.
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HFFG’s Debt (And Cash Flows)
HFFG's debt levels have fallen from US$28m to US$23m over the last 12 months , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$5.5m , ready to be used for running the business. On top of this, HFFG has generated US$12m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 52%, signalling that HFFG’s debt is appropriately covered by operating cash.
Can HFFG pay its short-term liabilities?
With current liabilities at US$34m, it appears that the company has been able to meet these commitments with a current assets level of US$59m, leading to a 1.76x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Consumer Retailing companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is HFFG’s debt level acceptable?
With debt reaching 67% of equity, HFFG may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether HFFG is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In HFFG's, case, the ratio of 11.78x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving HFFG ample headroom to grow its debt facilities.
Although HFFG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around HFFG's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how HFFG has been performing in the past. I recommend you continue to research HF Foods Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HFFG’s future growth? Take a look at our free research report of analyst consensus for HFFG’s outlook.
- Valuation: What is HFFG 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 HFFG 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.
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