While small-cap stocks, such as Hudbay Minerals Inc. (TSE:HBM) with its market cap of CA$2.6b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, these checks don’t give you a full picture, so I suggest you dig deeper yourself into HBM here.
HBM’s Debt (And Cash Flows)
HBM has sustained its debt level by about US$1.1b over the last 12 months including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$515m , ready to be used for running the business. Additionally, HBM has generated cash from operations of US$480m in the last twelve months, resulting in an operating cash to total debt ratio of 45%, indicating that HBM’s operating cash is sufficient to cover its debt.
Can HBM pay its short-term liabilities?
With current liabilities at US$327m, it seems that the business has been able to meet these obligations given the level of current assets of US$772m, with a current ratio of 2.36x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Metals and Mining companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does HBM face the risk of succumbing to its debt-load?
With debt reaching 48% of equity, HBM may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In HBM’s case, the ratio of 5.12x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving HBM ample headroom to grow its debt facilities.
HBM’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how HBM has been performing in the past. I recommend you continue to research Hudbay Minerals to get a better picture 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.
- Valuation: What is HBM 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 HBM is currently mispriced by the market.
- 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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