Hercules Capital trades at $16.95 and has moved in lockstep with the market. Its shares have returned 19.4% over the last six months while the S&P 500 has gained 22.1%.
Is now the time to buy Hercules Capital, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Hercules Capital Not Exciting?
We don’t have much confidence in Hercules Capital. Here are two reasons we avoid 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 14.8% 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 $50.43 million of cash and $2.34 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 $372.4 million of EBITDA over the last 12 months, we view Hercules Capital’s 6.1× 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 doesn’t pass our quality test. That said, the stock currently trades at 8.8× forward P/E (or $16.95 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We’re pretty confident there are superior stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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