While small-cap stocks, such as Highlight Event and Entertainment AG (VTX:HLEE) with its market cap of CHF174m, 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, 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. However, I know these factors are very high-level, so I suggest you dig deeper yourself into HLEE here.
Does HLEE produce enough cash relative to debt?
HLEE has built up its total debt levels in the last twelve months, from CHF26m to CHF207m , which includes long-term debt. With this rise in debt, HLEE currently has CHF63m remaining in cash and short-term investments for investing into the business. Moreover, HLEE has generated cash from operations of CHF219m over the same time period, resulting in an operating cash to total debt ratio of 106%, indicating that HLEE’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 HLEE’s case, it is able to generate 1.06x cash from its debt capital.
Can HLEE pay its short-term liabilities?
With current liabilities at CHF369m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.55x.
Can HLEE service its debt comfortably?
With a debt-to-equity ratio of 50%, HLEE can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
Although HLEE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure HLEE has company-specific issues impacting its capital structure decisions. You should 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.
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.