How Financially Strong Is New Hope Corporation Limited (ASX:NHC)?

Investors are always looking for growth in small-cap stocks like New Hope Corporation Limited (ASX:NHC), with a market cap of AU$2.7b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don’t give you a full picture, so I suggest you dig deeper yourself into NHC here.

NHC’s Debt (And Cash Flows)

Over the past year, NHC has ramped up its debt from AU$11m to AU$211m , which accounts for long term debt. With this growth in debt, NHC currently has AU$107m remaining in cash and short-term investments , ready to be used for running the business. Additionally, NHC has generated AU$394m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 187%, signalling that NHC’s current level of operating cash is high enough to cover debt.

Does NHC’s liquid assets cover its short-term commitments?

At the current liabilities level of AU$252m, it appears that the company has been able to meet these commitments with a current assets level of AU$318m, leading to a 1.26x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Oil and Gas companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

ASX:NHC Historical Debt, March 22nd 2019
ASX:NHC Historical Debt, March 22nd 2019

Does NHC face the risk of succumbing to its debt-load?

NHC’s level of debt is appropriate relative to its total equity, at 11%. This range is considered safe as NHC is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether NHC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In NHC’s, case, the ratio of 122x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

NHC has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how NHC has been performing in the past. You should continue to research New Hope to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for NHC’s future growth? Take a look at our free research report of analyst consensus for NHC’s outlook.
  2. Valuation: What is NHC 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 NHC is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.