While small-cap stocks, such as Hudbay Minerals Inc (TSE:HBM) with its market cap of CA$1.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, 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 HBM here.
Does HBM produce enough cash relative to debt?
HBM’s debt level has been constant at around US$1.1b over the previous year which accounts for long term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$460m for investing into the business. Additionally, HBM has generated cash from operations of US$472m during the same period of time, resulting in an operating cash to total debt ratio of 45%, meaning that HBM’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HBM’s case, it is able to generate 0.45x cash from its debt capital.
Can HBM meet its short-term obligations with the cash in hand?
At the current liabilities level of US$315m, the company has been able to meet these obligations given the level of current assets of US$770m, with a current ratio of 2.44x. For Metals and Mining companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can HBM service its debt comfortably?
HBM is a relatively highly levered company with a debt-to-equity of 48%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In HBM’s case, the ratio of 5.34x suggests that interest is appropriately 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.
Although HBM’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure HBM has company-specific issues impacting its capital structure decisions. I suggest you continue to research Hudbay Minerals to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HBM’s future growth? Take a look at our free research report of analyst consensus for HBM’s outlook.
- Historical Performance: What has HBM’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.