While small-cap stocks, such as Hallador Energy Company (NASDAQ:HNRG) with its market cap of US$159m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Oil and Gas industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into HNRG here.
Does HNRG produce enough cash relative to debt?
HNRG has shrunken its total debt levels in the last twelve months, from US$207m to US$192m , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$19m , ready to deploy into the business. Additionally, HNRG has generated US$44m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 23%, signalling that HNRG’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HNRG’s case, it is able to generate 0.23x cash from its debt capital.
Can HNRG pay its short-term liabilities?
Looking at HNRG’s US$50m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.93x. For Oil and Gas companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does HNRG face the risk of succumbing to its debt-load?
HNRG is a relatively highly levered company with a debt-to-equity of 75%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In HNRG’s case, the ratio of 1.61x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as HNRG’s low interest coverage already puts the company at higher risk of default.
Although HNRG’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. Since there is also no concerns around HNRG’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how HNRG has been performing in the past. You should continue to research Hallador Energy to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HNRG’s future growth? Take a look at our free research report of analyst consensus for HNRG’s outlook.
- Valuation: What is HNRG 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 HNRG 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.
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.