While small-cap stocks, such as Tahoe Resources Inc (TSX:THO) with its market cap of $1.78B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Check out our latest analysis for Tahoe Resources
How does THO’s operating cash flow stack up against its debt?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as economic recessions, wars and natural disasters.Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future.Can THO pay off what it owes to its debtholder by using only cash from its operational activities? THO’s recent operating cash flow exceeded its debt obligations within the past year,which indicates extremely low risk of THO not being able to meet its debt near-team, given that it generates enough cash in a year to pay off its current debt.This reflects proper cash and debt management by the company – great news for both debtholders and shareholders.
Can THO meet its short-term obligations with the cash in hand?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, THO could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for THO’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that THO is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Does THO face the risk of succumbing to its debt-load?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For THO, the debt-to-equity ratio is 1.75%, which indicates that the company faces low risk associated with debt. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings at least three times its interest payments is considered financially sound. In THO’s case, its interest is excessively covered by its earnings as the ratio sits at 56.44x. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
THO’s high cash coverage and low levels of debt indicate its ability to use its borrowings efficiently in order to produce a healthy cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Now that you know to keep debt in mind when putting together your investment thesis, I recommend you check out our latest free analysis report on Tahoe Resources to see what other factors for THO you should consider.
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