Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Hubbell Incorporated (NYSE:HUBB), with a market cap of US$5.8b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine HUBB’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Don’t forget that this is a general and concentrated examination of Hubbell’s financial health, so you should conduct further analysis into HUBB here.
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How does HUBB’s operating cash flow stack up against its debt?
Over the past year, HUBB has ramped up its debt from US$1.1b to US$1.9b , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at US$240m for investing into the business. On top of this, HUBB has generated US$490m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 25%, meaning that HUBB’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HUBB’s case, it is able to generate 0.25x cash from its debt capital.
Can HUBB meet its short-term obligations with the cash in hand?
At the current liabilities level of US$938m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.88x. Generally, for Electrical companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does HUBB face the risk of succumbing to its debt-load?
HUBB is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In HUBB’s case, the ratio of 9.68x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as HUBB’s high interest coverage is seen as responsible and safe practice.
Although HUBB’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 HUBB’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for HUBB’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Hubbell to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HUBB’s future growth? Take a look at our free research report of analyst consensus for HUBB’s outlook.
- Valuation: What is HUBB 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 HUBB 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.
To help readers see past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.