How Financially Strong Is Huon Aquaculture Group Limited (ASX:HUO)?

Huon Aquaculture Group Limited (ASX:HUO) is a small-cap stock with a market capitalization of AU$409.61M. 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? 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. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into HUO here.

Does HUO generate an acceptable amount of cash through operations?

Over the past year, HUO has maintained its debt levels at around AU$66.00M made up of current and long term debt. At this current level of debt, HUO currently has AU$23.00M remaining in cash and short-term investments for investing into the business. Additionally, HUO has produced AU$53.99M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 81.80%, signalling that HUO’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HUO’s case, it is able to generate 0.82x cash from its debt capital.

Can HUO meet its short-term obligations with the cash in hand?

Looking at HUO’s most recent AU$85.81M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of AU$256.34M, with a current ratio of 2.99x. Usually, for Food companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is HUO’s debt level acceptable?

With a debt-to-equity ratio of 22.51%, HUO's debt level may be seen as prudent. This range is considered safe as HUO is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether HUO 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 HUO's, case, the ratio of 16.65x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as HUO’s high interest coverage is seen as responsible and safe practice.

Next Steps:

HUO’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure HUO has company-specific issues impacting its capital structure decisions. I suggest you continue to research Huon Aquaculture Group to get a better picture of the stock by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for HUO’s future growth? Take a look at our free research report of analyst consensus for HUO’s outlook.
• 2. Valuation: What is HUO 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 HUO 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.