Hercules Capital currently trades at $16.35 per share and has shown little upside over the past six months, posting a small loss of 0.6%. The stock also fell short of the S&P 500’s 4.5% gain during that period.

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Why is Hercules Capital not exciting?

We’re sitting this one out for now. Here are three reasons we avoid HTGC, plus one stock we’d rather own.

1. Lackluster revenue growth

We at StockStory place the most emphasis on long-term growth, but within financials, a stretched historical view may miss recent interest rate changes, market returns, and industry trends. Hercules Capital’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 7.2% over the last two years was well below its five-year trend. Note: Quarters not shown were determined to be outliers because they were impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

2. EPS barely growing

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Hercules Capital’s EPS grew at an unimpressive 7.9% compounded annual growth rate over the last five years, lower than its 14.9% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

3. High debt levels increase risk

Hercules Capital reported $50.56 million of cash and $2.57 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 $371.6 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. With its shares underperforming the market lately, the stock trades at 8.6× forward P/E (or $16.35 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 recommend looking at a dominant aerospace business that has perfected its M&A strategy.

Stocks we would buy instead of Hercules Capital

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