Although mid-cap stocks, such as Toromont Industries Ltd (TSX:TIH) with a market-capitalization of USD $2,671 Million, aren’t as popular among investors, they have delivered the most impressive risk adjusted returns. While mid-caps are way less volatile than small-caps, conservative investors who generally like blue-chip stocks, may still find them risky. On that front, TIH impresses with its low debt-to-equity ratio (17.2%). But a complete picture of its financial health also includes testing its liquidity and earnings against its debt-obligations. Check out our latest analysis for Toromont Industries
Does Toromont Industries’s liquidity position also indicate financial strength?
To test Toromont Industries’s financial condition further, I would weigh its current assets against the total debt. The level of current assets indicates TIH’s ability to survive a downturn, which most companies face several times in their life cycle. TIH’s current assets ($908M) easily cover the total debt ($153M), giving it enough control on its balance sheet to survive a downturn.
Does TIH net enough to cover its debt-costs?
Another key metric that investors should consider is how Toromont Industries’s earnings stack up against its debt. While both of these figures are taken from the income statement, they highlight a key aspect of financial strength: how much a company earns compared to its interest outflows.An earnings to interest expense ratio of over five is a sign of good financial health as a company can easily cover those costs even if its earnings contract. In the case of TIH, the interest on debt is well covered by earnings (47.1x coverage).
Along with a low debt-to-equity ratio, TIH has a strong liquidity position and it earns enough to easily cover its interest costs. However, to sustain its strong position, I would like it to generate healthy cash flows (at least 20% of the total debt), and recommend potential investors look into this metric prior to any buy or sell decisions.
Now that you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you check out our latest free analysis report on Toromont Industries to see what are TIH’s growth prospects and whether it could be considered an undervalued opportunity.
PS. If you are not interested in Toromont Industries anymore, you can use our free platform to see my list of over 100 other stocks with a high growth potential.