Over the past six months, Hercules Capital’s stock price fell to $15.30. Shareholders have lost 16.9% of their capital, which is disappointing considering the S&P 500 has climbed by 8.5%. This may have investors wondering how to approach the situation.
Is now the time to buy Hercules Capital, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Hercules Capital Not Exciting?
Despite the more favorable entry price, we’re cautious about Hercules Capital. Here are two reasons you should be careful with HTGC, plus one stock we’d rather own.
1. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Hercules Capital’s EPS grew at an unimpressive 8% compounded annual growth rate over the last five years, lower than its 14.4% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
2. High Debt Levels Increase Risk
Hercules Capital reported $44.93 million of cash and $2.54 billion of debt on its balance sheet in the most recent quarter.
As investors in high-quality companies, we primarily focus on whether a company’s profits can support its debt.
With $368 million of EBITDA over the last 12 months, we view Hercules Capital’s 6.8× net-debt-to-EBITDA ratio as inadequate. The company’s lacking profits relative to its borrowings give it little breathing room, raising red flags.
Final Judgment
Hercules Capital isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 7.9× forward P/E (or $15.30 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We’re fairly confident there are better investments elsewhere. We’d suggest looking at one of our all-time favorite software stocks.
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