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While small-cap stocks, such as Hortico S.A. (WSE:HOR) with its market cap of zł25m, 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. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into HOR here.
How does HOR’s operating cash flow stack up against its debt?
Over the past year, HOR has maintained its debt levels at around zł16m which accounts for long term debt. At this current level of debt, the current cash and short-term investment levels stands at zł977k , ready to deploy into the business. On top of this, HOR has generated cash from operations of zł2.2m in the last twelve months, resulting in an operating cash to total debt ratio of 13%, meaning that HOR’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HOR’s case, it is able to generate 0.13x cash from its debt capital.
Can HOR pay its short-term liabilities?
Looking at HOR’s zł37m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of zł45m, leading to a 1.23x current account ratio. Usually, for Trade Distributors companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can HOR service its debt comfortably?
With a debt-to-equity ratio of 68%, HOR 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. We can test if HOR’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 HOR, the ratio of 4.69x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as HOR’s high interest coverage is seen as responsible and safe practice.
HOR’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around HOR’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 HOR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Hortico to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HOR’s future growth? Take a look at our free research report of analyst consensus for HOR’s outlook.
- Historical Performance: What has HOR’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 firstname.lastname@example.org.