Investors are always looking for growth in small-cap stocks like Hutter & Schrantz Stahlbau AG (WBAG:HST), with a market cap of €48.16M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into HST here.
Does HST generate enough cash through operations?
HST’s debt levels have fallen from €18.98M to €16.38M over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, HST’s cash and short-term investments stands at €16.53M for investing into the business. On top of this, HST has generated €112.00K in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 0.68%, signalling that HST’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HST’s case, it is able to generate 0.0068x cash from its debt capital.
Can HST meet its short-term obligations with the cash in hand?
At the current liabilities level of €16.28M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.46x. Though, anything above 3x is considered high and could mean that HST has too much idle capital in low-earning investments.
Can HST service its debt comfortably?
HST is a relatively highly levered company with a debt-to-equity of 43.55%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if HST’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For HST, the ratio of 4.13x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving HST ample headroom to grow its debt facilities.Next Steps:
HST’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 will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for HST’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Hutter & Schrantz Stahlbau to get a better picture of the stock by looking at:
- 1. Historical Performance: What has HST’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.