Investors are always looking for growth in small-cap stocks like Houghton Mifflin Harcourt Company (NASDAQ:HMHC), with a market cap of US$823m. However, an important fact which most ignore is: how financially healthy is the business? Given that HMHC is not presently profitable, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into HMHC here.
Does HMHC produce enough cash relative to debt?
Over the past year, HMHC has ramped up its debt from US$776m to US$816m , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$31m for investing into the business. On top of this, HMHC has produced cash from operations of US$112m during the same period of time, leading to an operating cash to total debt ratio of 14%, meaning that HMHC’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In HMHC’s case, it is able to generate 0.14x cash from its debt capital.
Can HMHC pay its short-term liabilities?
At the current liabilities level of US$539m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$568m, leading to a 1.05x current account ratio. Usually, for Consumer Services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does HMHC face the risk of succumbing to its debt-load?
With total debt exceeding equities, HMHC is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since HMHC is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
HMHC’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how HMHC has been performing in the past. I recommend you continue to research Houghton Mifflin Harcourt to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HMHC’s future growth? Take a look at our free research report of analyst consensus for HMHC’s outlook.
- Valuation: What is HMHC 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 HMHC is currently mispriced by the market.
- 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.
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