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Highlight Event and Entertainment AG (VTX:HLEE) is a small-cap stock with a market capitalization of CHF160m. 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? Given that HLEE is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company’s balance sheet strength. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into HLEE here.
Does HLEE Produce Much Cash Relative To Its Debt?
HLEE’s debt levels surged from CHF164m to CHF234m over the last 12 months – this includes long-term debt. With this rise in debt, HLEE’s cash and short-term investments stands at CHF94m to keep the business going. On top of this, HLEE has generated CHF155m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 66%, signalling that HLEE’s current level of operating cash is high enough to cover debt.
Can HLEE pay its short-term liabilities?
Looking at HLEE’s CHF456m in current liabilities, the company may not be able to easily meet these obligations given the level of current assets of CHF235m, with a current ratio of 0.52x. The current ratio is the number you get when you divide current assets by current liabilities.
Is HLEE’s debt level acceptable?
With a debt-to-equity ratio of 60%, HLEE can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since HLEE is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
HLEE’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for HLEE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Highlight Event and Entertainment to get a better picture of the stock by looking at:
- Historical Performance: What has HLEE’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.
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If you spot an error that warrants correction, please contact the editor at email@example.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.