Yahoo Finance Are Hochschild Mining plc’s (LON:HOC) Interest Costs Too High?
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While small-cap stocks, such as Hochschild Mining plc (LON:HOC) with its market cap of UK£974m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to 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’d encourage you to dig deeper yourself into HOC here.
How much cash does HOC generate through its operations?
HOC has shrunken its total debt levels in the last twelve months, from US$309m to US$209m , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$142m , ready to deploy into the business. Additionally, HOC has produced cash from operations of US$271m during the same period of time, leading to an operating cash to total debt ratio of 129%, meaning that HOC’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HOC’s case, it is able to generate 1.29x cash from its debt capital.
Can HOC meet its short-term obligations with the cash in hand?
Looking at HOC’s US$228m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$281m, with a current ratio of 1.23x. For Metals and Mining 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.
Can HOC service its debt comfortably?
HOC’s level of debt is appropriate relative to its total equity, at 26%. HOC is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if HOC’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 HOC, the ratio of 8.22x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving HOC ample headroom to grow its debt facilities.
Next Steps:
HOC has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure HOC has company-specific issues impacting its capital structure decisions. You should continue to research Hochschild Mining to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for HOC’s future growth? Take a look at our free research report of analyst consensus for HOC’s outlook.
Valuation: What is HOC 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 HOC 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 editorial-team@simplywallst.com.
