Investors are always looking for growth in small-cap stocks like HC2 Holdings Inc (NYSE:HCHC), with a market cap of $256.61M. However, an important fact which most ignore is: how financially healthy is the business? Since HCHC is loss-making right now, it’s essential to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into HCHC here.

How does HCHC’s operating cash flow stack up against its debt?

Over the past year, HCHC has ramped up its debt from $371.9M to $428.5M – this includes both the current and long-term debt. With this rise in debt, HCHC’s cash and short-term investments stands at $115.4M , ready to deploy into the business. Moreover, HCHC has produced $79.1M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 18.47%, signalling that HCHC’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In HCHC’s case, it is able to generate 0.18x cash from its debt capital.

Can HCHC pay its short-term liabilities?

With current liabilities at $299.0M, the company has been able to meet these commitments with a current assets level of $960.7M, leading to a 3.21x current account ratio. Though, anything above 3x is considered high and could mean that HCHC has too much idle capital in low-earning investments.

Does HCHC face the risk of succumbing to its debt-load?

Since total debt levels have outpaced equities, HCHC is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since HCHC is presently unprofitable, sustainability of its current state of operations becomes a concern. 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:

At its current level of cash flow coverage, HCHC has room for improvement to better cushion for events which may require debt repayment. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. This is only a rough assessment of financial health, and I’m sure HCHC has company-specific issues impacting its capital structure decisions. You should continue to research HC2 Holdings to get a better picture of the stock by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for HCHC’s future growth? Take a look at our free research report of analyst consensus for HCHC’s outlook.

• 2. Valuation: What is HCHC 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 HCHC is currently mispriced by the market.

• 3. 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 pass 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.