Is Talenom Oyj’s (HEL:TNOM) Balance Sheet Strong Enough To Weather A Storm?

Talenom Oyj (HEL:TNOM) is a small-cap stock with a market capitalization of €144m. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into TNOM here.

How much cash does TNOM generate through its operations?

TNOM has sustained its debt level by about €23m over the last 12 months – this includes long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at €4.0m for investing into the business. Additionally, TNOM has produced cash from operations of €12m during the same period of time, resulting in an operating cash to total debt ratio of 52%, signalling that TNOM’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TNOM’s case, it is able to generate 0.52x cash from its debt capital.

Can TNOM meet its short-term obligations with the cash in hand?

At the current liabilities level of €9.8m, it appears that the company may not have an easy time meeting these commitments with a current assets level of €9.2m, leading to a current ratio of 0.93x.

HLSE:TNOM Historical Debt January 22nd 19
HLSE:TNOM Historical Debt January 22nd 19

Is TNOM’s debt level acceptable?

Since total debt levels have outpaced equities, TNOM is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if TNOM’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For TNOM, the ratio of 16.08x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as TNOM’s high interest coverage is seen as responsible and safe practice.

Next Steps:

TNOM’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure TNOM has company-specific issues impacting its capital structure decisions. You should continue to research Talenom Oyj to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for TNOM’s future growth? Take a look at our free research report of analyst consensus for TNOM’s outlook.
  2. Valuation: What is TNOM 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 TNOM is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com.