Hunter Group ASA (OB:HUNT) is a small-cap stock with a market capitalization of ØRE322.65M. 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? Energy Services companies, especially ones that are currently loss-making, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into HUNT here.
How does HUNT’s operating cash flow stack up against its debt?
HUNT has built up its total debt levels in the last twelve months, from ØRE6.89M to ØRE15.30M , which comprises of short- and long-term debt. With this increase in debt, HUNT currently has ØRE279.46M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of HUNT’s operating efficiency ratios such as ROA here.
Can HUNT meet its short-term obligations with the cash in hand?
Looking at HUNT’s most recent ØRE22.21M liabilities, it seems that the business has been able to meet these commitments with a current assets level of ØRE325.77M, leading to a 14.67x current account ratio. However, a ratio greater than 3x may be considered as too high, as HUNT could be holding too much capital in a low-return investment environment.
Does HUNT face the risk of succumbing to its debt-load?With debt at 3.69% of equity, HUNT may be thought of as having low leverage. This range is considered safe as HUNT is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Risk around debt is extremely low for HUNT, and the company also has the ability and headroom to increase debt if needed going forward.
HUNT’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how HUNT has been performing in the past. You should continue to research Hunter Group to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has HUNT’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.