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What Investors Should Know About Hudbay Minerals Inc’s (TSE:HBM) Financial Strength

Hudbay Minerals Inc (TSE:HBM) is a small-cap stock with a market capitalization of CA$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? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I recommend you dig deeper yourself into HBM here.

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

HBM has shrunken its total debt levels in the last twelve months, from US$1.1b to US$1.1b – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$440m for investing into the business. On top of this, HBM has generated US$526m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 50%, meaning that HBM’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HBM’s case, it is able to generate 0.5x cash from its debt capital.

Can HBM meet its short-term obligations with the cash in hand?

Looking at HBM’s most recent US$349m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.15x. Generally, for Metals and Mining companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

TSX:HBM Historical Debt October 31st 18
TSX:HBM Historical Debt October 31st 18

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

With a debt-to-equity ratio of 49%, HBM can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if HBM’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 HBM, the ratio of 5.65x suggests that interest is appropriately 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.

Next Steps:

HBM’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around HBM’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for HBM’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Hudbay Minerals to get a better picture of the small-cap by looking at:

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

  2. Historical Performance: What has HBM’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

  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 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.