Are Haverty Furniture Companies Inc’s (NYSE:HVT) Interest Costs Too High?

Haverty Furniture Companies Inc (NYSE:HVT) is a small-cap stock with a market capitalization of US$428m. 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? Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into HVT here.

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

HVT’s debt level has been constant at around US$53m over the previous year , which is mainly comprised of near term debt. At this stable level of debt, HVT currently has US$75m remaining in cash and short-term investments for investing into the business. On top of this, HVT has generated US$61m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 116%, signalling that HVT’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 HVT’s case, it is able to generate 1.16x cash from its debt capital.

Does HVT’s liquid assets cover its short-term commitments?

At the current liabilities level of US$92m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$211m, with a current ratio of 2.29x. Generally, for Specialty Retail companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

More

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

With a debt-to-equity ratio of 18%, HVT’s debt level may be seen as prudent. HVT is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether HVT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In HVT’s, case, the ratio of 20.94x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving HVT ample headroom to grow its debt facilities.

Next Steps:

HVT’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, 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 HVT’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Haverty Furniture Companies to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for HVT’s future growth? Take a look at our free research report of analyst consensus for HVT’s outlook.
2. Valuation: What is HVT 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 HVT 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 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 [email protected].