While small-cap stocks, such as Houston Wire & Cable Company (NASDAQ:HWCC) with its market cap of US$131.03M, 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 HWCC is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I recommend you dig deeper yourself into HWCC here.
How does HWCC’s operating cash flow stack up against its debt?
HWCC’s debt levels surged from US$63.57M to US$76.58M over the last 12 months – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$0 for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of HWCC’s operating efficiency ratios such as ROA here.
Can HWCC meet its short-term obligations with the cash in hand?
With current liabilities at US$28.30M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.23x. However, a ratio greater than 3x may be considered as too high, as HWCC could be holding too much capital in a low-return investment environment.
Can HWCC service its debt comfortably?
With a debt-to-equity ratio of 84.40%, HWCC 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. However, since HWCC is currently 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.
HWCC’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. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure HWCC has company-specific issues impacting its capital structure decisions. You should continue to research Houston Wire & Cable to get a better picture of the stock by looking at:
- 1. Historical Performance: What has HWCC’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.
- 2. 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.