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Investors are always looking for growth in small-cap stocks like Hilton Food Group plc (LON:HFG), with a market cap of UK£840m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes essential, as mismanagement of capital can lead to 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, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into HFG here.
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HFG’s Debt (And Cash Flows)
HFG has built up its total debt levels in the last twelve months, from UK£53m to UK£115m , which accounts for long term debt. With this increase in debt, HFG's cash and short-term investments stands at UK£88m , ready to be used for running the business. Moreover, HFG has produced UK£53m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 47%, meaning that HFG’s debt is appropriately covered by operating cash.
Can HFG pay its short-term liabilities?
With current liabilities at UK£280m, the company has been able to meet these commitments with a current assets level of UK£343m, leading to a 1.23x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Food 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.
Can HFG service its debt comfortably?
With a debt-to-equity ratio of 63%, HFG can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if HFG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For HFG, the ratio of 13.85x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving HFG ample headroom to grow its debt facilities.
Next Steps:
HFG’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. Since there is also no concerns around HFG'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 HFG has been performing in the past. You should continue to research Hilton Food Group to get a more holistic view of the small-cap by looking at: