While small-cap stocks, such as Highlight Event and Entertainment AG (VTX:HLEE) with its market cap of CHF171m, 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 crucial, since poor capital management may bring about 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, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into HLEE here.
How does HLEE’s operating cash flow stack up against its debt?
Over the past year, HLEE has ramped up its debt from CHF26m to CHF207m , which includes long-term debt. With this growth in debt, HLEE currently has CHF63m remaining in cash and short-term investments , ready to deploy into the business. Moreover, HLEE has produced cash from operations of CHF219m during the same period of time, resulting in an operating cash to total debt ratio of 106%, indicating that HLEE’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 HLEE’s case, it is able to generate 1.06x cash from its debt capital.
Can HLEE meet its short-term obligations with the cash in hand?
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.
Does HLEE face the risk of succumbing to its debt-load?
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.
Next Steps:
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. But, its lack of liquidity raises questions over current asset management practices 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 recommend 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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