Hurtimex SA (WSE:HRT): Time For A Financial Health Check

Hurtimex SA (WSE:HRT) is a small-cap stock with a market capitalization of zł5.4m. 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? Understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into HRT here.

HRT’s Debt (And Cash Flows)

Over the past year, HRT has maintained its debt levels at around zł2.6m – this includes long-term debt. At this stable level of debt, HRT currently has zł1.3m remaining in cash and short-term investments , ready to be used for running the business. On top of this, HRT has produced cash from operations of zł437k over the same time period, leading to an operating cash to total debt ratio of 17%, indicating that HRT’s operating cash is less than its debt.

Can HRT pay its short-term liabilities?

With current liabilities at zł1.9m, the company has been able to meet these obligations given the level of current assets of zł8.1m, with a current ratio of 4.26x. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.

WSE:HRT Historical Debt, March 11th 2019
WSE:HRT Historical Debt, March 11th 2019

Does HRT face the risk of succumbing to its debt-load?

HRT is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether HRT 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 HRT’s, case, the ratio of 3.44x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving HRT ample headroom to grow its debt facilities.

Next Steps:

Although HRT’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how HRT has been performing in the past. I recommend you continue to research Hurtimex to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for HRT’s future growth? Take a look at our free research report of analyst consensus for HRT’s outlook.
  2. Valuation: What is HRT 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 HRT is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.