While small-cap stocks, such as Hunting plc (LSE:HTG) with its market cap of GBP $766.57M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. See our latest analysis for HTG
Does HTG generate an acceptable amount of cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These adverse events bring devastation and yet does not absolve the company from its debt. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. Last year, HTG’s operating cash flow was 0.58x its current debt. This is a good sign, as over half of HTG’s near term debt can be covered by its day-to-day cash income, which reduces its riskiness to its debtholders.
Does HTG’s liquid assets cover its short-term commitments?
In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. As cash flow from operation is hindered by adverse events, HTG may need to liquidate its short-term assets to meet these upcoming payments. We test for HTG’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that HTG is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Can HTG service its debt comfortably?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. For HTG, the debt-to-equity ratio is 2.39%, which indicates that the company faces low risk associated with debt.
Are you a shareholder? HTG’s high cash coverage and conservative debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But it is still important for shareholders to understand why the company isn’t increasing its cheaper cost of capital to fund future growth, especially if meeting short-term obligations could also bring about issues. I recommend taking a look at HTG’s future growth analysis on our free platform. to properly assess the company’s position in further detail.
Are you a potential investor? HTG’s high cash coverage and low levels of debt indicate its ability to use its borrowings efficiently in order to produce a healthy cash flow. However, in the event of adversity, its low liquidity raises concerns over whether short term obligations can be met in time. As a following step, you should take a look at HTG’s past performance analysis on our free platform to conclude on HTG’s financial health.