What You Must Know About Hillgrove Resources Limited’s (ASX:HGO) Financial Strength
Investors are always looking for growth in small-cap stocks like Hillgrove Resources Limited (ASX:HGO), with a market cap of AU$47.79M. However, an important fact which most ignore is: how financially healthy is the business? Given that HGO is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into HGO here.
Does HGO generate an acceptable amount of cash through operations?
HGO’s debt levels have fallen from AU$13.03M to AU$9.54M over the last 12 months , which is made up of current and long term debt. With this reduction in debt, HGO’s cash and short-term investments stands at AU$471.00K for investing into the business. On top of this, HGO has produced AU$642.00K in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 6.73%, indicating that HGO’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In HGO’s case, it is able to generate 0.067x cash from its debt capital.
Can HGO pay its short-term liabilities?
With current liabilities at AU$66.39M, the company is not able to meet these obligations given the level of current assets of AU$17.57M, with a current ratio of 0.26x below the prudent level of 3x.
Can HGO service its debt comfortably?
With a debt-to-equity ratio of 69.36%, HGO can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since HGO is currently unprofitable, 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.
Next Steps:
HGO’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure HGO has company-specific issues impacting its capital structure decisions. I recommend you continue to research Hillgrove Resources to get a better picture of the stock by looking at:
1. Valuation: What is HGO 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 HGO is currently mispriced by the market.
2. Historical Performance: What has HGO’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
3. 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.
