What Investors Should Know About Hyster-Yale Materials Handling, Inc.’s (NYSE:HY) Financial Strength

Hyster-Yale Materials Handling, Inc. (NYSE:HY) is a small-cap stock with a market capitalization of US$1.0b. 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. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into HY here.

HY’s Debt (And Cash Flows)

HY has sustained its debt level by about US$302m over the last 12 months which accounts for long term debt. At this constant level of debt, HY currently has US$84m remaining in cash and short-term investments to keep the business going. Moreover, HY has produced cash from operations of US$68m in the last twelve months, resulting in an operating cash to total debt ratio of 22%, signalling that HY’s debt is appropriately covered by operating cash.

Can HY pay its short-term liabilities?

At the current liabilities level of US$776m, it seems that the business has been able to meet these obligations given the level of current assets of US$1.1b, with a current ratio of 1.46x. The current ratio is calculated by dividing current assets by current liabilities. For Machinery companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:HY Historical Debt, March 24th 2019
NYSE:HY Historical Debt, March 24th 2019

Is HY’s debt level acceptable?

With a debt-to-equity ratio of 54%, HY can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In HY’s case, the ratio of 2.45x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

Although HY’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. I admit this is a fairly basic analysis for HY’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Hyster-Yale Materials Handling to get a better picture of the small-cap by looking at:

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