Investors are always looking for growth in small-cap stocks like Hello Pal International Inc (CNSX:HP), with a market cap of CA$20.28m. However, an important fact which most ignore is: how financially healthy is the business? Software companies, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into HP here.
How much cash does HP generate through its operations?
HP has shrunken its total debt levels in the last twelve months, from CA$54.25k to CA$12.82k – this includes both the current and long-term debt. With this debt repayment, HP’s cash and short-term investments stands at CA$285.07k , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of HP’s operating efficiency ratios such as ROA here.
Does HP’s liquid assets cover its short-term commitments?
At the current liabilities level of CA$214.03k liabilities, the company has been able to meet these obligations given the level of current assets of CA$314.09k, with a current ratio of 1.47x. For Software 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.
Does HP face the risk of succumbing to its debt-load?
With debt at 4.88% of equity, HP may be thought of as having low leverage. HP is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is extremely low for HP, and the company also has the ability and headroom to increase debt if needed going forward.Next Steps:
HP’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how HP has been performing in the past. I suggest you continue to research Hello Pal International to get a more holistic view of the stock by looking at:
- Historical Performance: What has HP’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.