Investors are always looking for growth in small-cap stocks like Hillgrove Resources Limited (ASX:HGO), with a market cap of A$34.69M. However, an important fact which most ignore is: how financially healthy is the business? Since HGO is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into HGO here.
Does HGO generate an acceptable amount of cash through operations?
Over the past year, HGO has reduced its debt from A$18.9M to A$13.4M , which is made up of current and long term debt. With this debt payback, HGO currently has A$1.9M remaining in cash and short-term investments for investing into the business. Moreover, HGO has produced cash from operations of A$21.0M in the last twelve months, resulting in an operating cash to total debt ratio of 1.58x, indicating that HGO’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In HGO’s case, it is able to generate 1.58x cash from its debt capital.
Does HGO’s liquid assets cover its short-term commitments?
At the current liabilities level of A$45.6M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.25x, which is below the prudent industry ratio of 3x.
Does HGO face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, HGO is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since HGO is presently unprofitable, 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.
Next Steps:
Are you a shareholder? HGO’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. However, its lack of liquidity means the company may be pressed to meet its short-term obligations, and raising further debt to meet these expenses could be challenging. Going forward, its financial position may be different. You should always be keeping on top of market expectations for HGO’s future growth on our free analysis platform.