Huntsworth plc (LSE:HNT) is a small-cap stock with a market capitalization of UK£326.46M. 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? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into HNT here.
Does HNT generate an acceptable amount of cash through operations?
HNT has sustained its debt level by about UK£46.31M over the last 12 months comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at UK£10.05M , ready to deploy into the business. On top of this, HNT has generated UK£22.62M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 48.85%, indicating that HNT’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 HNT’s case, it is able to generate 0.49x cash from its debt capital.
Can HNT pay its short-term liabilities?
At the current liabilities level of UK£70.20M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.23x. For Media 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.
Can HNT service its debt comfortably?With a debt-to-equity ratio of 29.42%, HNT’s debt level may be seen as prudent. HNT is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if HNT’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For HNT, the ratio of 11.98x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving HNT ample headroom to grow its debt facilities.
HNT’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure HNT has company-specific issues impacting its capital structure decisions. You should continue to research Huntsworth to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HNT’s future growth? Take a look at our free research report of analyst consensus for HNT’s outlook.
- Valuation: What is HNT 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 HNT 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.