While small-cap stocks, such as Técnicas Reunidas SA (BME:TRE) with its market cap of €1.46b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Energy Services companies, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into TRE here.
How much cash does TRE generate through its operations?
TRE’s debt levels surged from €323.70m to €478.60m over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, TRE’s cash and short-term investments stands at €697.60m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of TRE’s operating efficiency ratios such as ROA here.
Can TRE pay its short-term liabilities?
Looking at TRE’s most recent €3.01b liabilities, it appears that the company has been able to meet these commitments with a current assets level of €3.46b, leading to a 1.15x current account ratio. For Energy Services companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can TRE service its debt comfortably?TRE is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether TRE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TRE’s, case, the ratio of 21.78x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
At its current level of cash flow coverage, TRE has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for TRE’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Técnicas Reunidas to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TRE’s future growth? Take a look at our free research report of analyst consensus for TRE’s outlook.
- Valuation: What is TRE 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 TRE is currently mispriced by the market.
- 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.