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Hub Group, Inc. (NASDAQ:HUBG) is a small-cap stock with a market capitalization of US$1.3b. 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? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into HUBG here.
Does HUBG produce enough cash relative to debt?
HUBG has sustained its debt level by about US$312m over the last 12 months – this includes long-term debt. At this stable level of debt, HUBG currently has US$268m remaining in cash and short-term investments for investing into the business. On top of this, HUBG has generated cash from operations of US$179m in the last twelve months, leading to an operating cash to total debt ratio of 57%, indicating that HUBG’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HUBG’s case, it is able to generate 0.57x cash from its debt capital.
Can HUBG pay its short-term liabilities?
At the current liabilities level of US$491m, the company has been able to meet these obligations given the level of current assets of US$755m, with a current ratio of 1.54x. Usually, for Logistics 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 HUBG service its debt comfortably?
With a debt-to-equity ratio of 34%, HUBG’s debt level may be seen as prudent. HUBG is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether HUBG is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In HUBG’s, case, the ratio of 15.57x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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HUBG has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how HUBG has been performing in the past. I suggest you continue to research Hub Group to get a better picture of the stock by looking at: