Yahoo Finance Is H2O Innovation Inc (CVE:HEO) A Financially Sound Company?
H2O Innovation Inc (CVE:HEO) is a small-cap stock with a market capitalization of CA$47.0m. 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? Given that HEO is not presently profitable, it’s vital to assess 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, I know these factors are very high-level, so I suggest you dig deeper yourself into HEO here.
How much cash does HEO generate through its operations?
HEO’s debt levels surged from CA$16.7m to CA$18.9m over the last 12 months , which is made up of current and long term debt. With this increase in debt, HEO’s cash and short-term investments stands at CA$4.5m , ready to deploy into the business. Additionally, HEO has produced CA$3.3m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 17.4%, signalling that HEO’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In HEO’s case, it is able to generate 0.17x cash from its debt capital.
Does HEO’s liquid assets cover its short-term commitments?
Looking at HEO’s most recent CA$26.3m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.3x. Generally, for Machinery companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does HEO face the risk of succumbing to its debt-load?
HEO is a relatively highly levered company with a debt-to-equity of 46.2%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since HEO 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:
HEO’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for HEO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research H2O Innovation to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for HEO’s future growth? Take a look at our free research report of analyst consensus for HEO’s outlook.
Valuation: What is HEO 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 HEO 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.
