Himachal Futuristic Communications Limited (NSEI:HFCL) is a small-cap stock with a market capitalization of ₹33.83B. 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? Companies operating in the Telecom industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into HFCL here.
Does HFCL generate an acceptable amount of cash through operations?
HFCL’s debt level has been constant at around ₹5.39B over the previous year – this includes both the current and long-term debt. At this current level of debt, HFCL currently has ₹1.02B remaining in cash and short-term investments for investing into the business. On top of this, HFCL has generated ₹1.36B in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 25.18%, meaning that HFCL’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HFCL’s case, it is able to generate 0.25x cash from its debt capital.
Can HFCL meet its short-term obligations with the cash in hand?
With current liabilities at ₹10.23B, it appears that the company has been able to meet these obligations given the level of current assets of ₹20.28B, with a current ratio of 1.98x. Usually, for Telecom companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is HFCL’s debt level acceptable?HFCL is a relatively highly levered company with a debt-to-equity of 55.79%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether HFCL is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In HFCL’s, case, the ratio of 4.58x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as HFCL’s high interest coverage is seen as responsible and safe practice.
Although HFCL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around HFCL’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure HFCL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Himachal Futuristic Communications to get a more holistic view of the small-cap by looking at:
- 1. Historical Performance: What has HFCL’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.
- 2. 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.