HRL Holdings Limited (ASX:HRL) is a small-cap stock with a market capitalization of AU$88.81m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that HRL is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I recommend you dig deeper yourself into HRL here.
How does HRL’s operating cash flow stack up against its debt?
HRL has shrunken its total debt levels in the last twelve months, from AU$1.37m to AU$836.35k , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at AU$728.17k , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of HRL’s operating efficiency ratios such as ROA here.
Can HRL pay its short-term liabilities?
Looking at HRL’s most recent AU$3.18m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of AU$4.42m, with a current ratio of 1.39x. Usually, for Commercial Services companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is HRL’s debt level acceptable?With debt at 2.00% of equity, HRL may be thought of as having low leverage. This range is considered safe as HRL is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. HRL’s risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.
HRL’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how HRL has been performing in the past. I suggest you continue to research HRL Holdings to get a better picture of the stock by looking at:
- Valuation: What is HRL 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 HRL is currently mispriced by the market.
- Historical Performance: What has HRL’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.
- 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.