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Investors are always looking for growth in small-cap stocks like Highlight Event and Entertainment AG (VTX:HLEE), with a market cap of CHF186m. However, an important fact which most ignore is: how financially healthy is the business? Given that HLEE is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into HLEE here.
Does HLEE Produce Much Cash Relative To Its Debt?
HLEE has built up its total debt levels in the last twelve months, from CHF164m to CHF234m , which includes long-term debt. With this growth in debt, HLEE's cash and short-term investments stands at CHF59m to keep the business going. Additionally, HLEE has produced CHF155m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 66%, signalling that HLEE’s current level of operating cash is high enough to cover debt.
Does HLEE’s liquid assets cover its short-term commitments?
With current liabilities at CHF456m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.52x. The current ratio is the number you get when you divide current assets by current liabilities.
Does HLEE face the risk of succumbing to its debt-load?
With debt reaching 60% of equity, HLEE may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since HLEE is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although HLEE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for HLEE's financial health. Other important fundamentals need to be considered alongside. You should continue to research Highlight Event and Entertainment to get a more holistic view of the stock by looking at: