Técnicas Reunidas SA (BME:TRE) is a small-cap stock with a market capitalization of €1.3b. 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? Energy Services companies, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into TRE here.
How does TRE’s operating cash flow stack up against its debt?
TRE has built up its total debt levels in the last twelve months, from €385m to €516m , which is made up of current and long term debt. With this growth in debt, TRE’s cash and short-term investments stands at €743m for investing into the business. On top of this, TRE has produced cash from operations of €71m during the same period of time, leading to an operating cash to total debt ratio of 14%, signalling that TRE’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In TRE’s case, it is able to generate 0.14x cash from its debt capital.
Does TRE’s liquid assets cover its short-term commitments?
Looking at TRE’s most recent €3.2b liabilities, the company has been able to meet these obligations given the level of current assets of €3.6b, with a current ratio of 1.14x. For Energy Services companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
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. Though, since TRE is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
TRE’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure TRE has company-specific issues impacting its capital structure decisions. I suggest 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.