Tessenderlo Group NV (EBR:TESB) is a small-cap stock with a market capitalization of €1.4b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into TESB here.
TESB’s Debt (And Cash Flows)
TESB has built up its total debt levels in the last twelve months, from €254m to €542m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at €164m , ready to be used for running the business. On top of this, TESB has produced cash from operations of €108m during the same period of time, resulting in an operating cash to total debt ratio of 20%, meaning that TESB’s debt is not covered by operating cash.
Does TESB’s liquid assets cover its short-term commitments?
At the current liabilities level of €327m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.31x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Chemicals companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can TESB service its debt comfortably?
TESB is a relatively highly levered company with a debt-to-equity of 74%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TESB’s case, the ratio of 12.21x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as TESB’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although TESB’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around TESB’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure TESB has company-specific issues impacting its capital structure decisions. You should continue to research Tessenderlo Group to get a better picture of the small-cap by looking at:
- Valuation: What is TESB worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TESB is currently mispriced by the market.
- Historical Performance: What has TESB’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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