Is Tikkurila Oyj’s (HEL:TIK1V) Balance Sheet Strong Enough To Weather A Storm?

Investors are always looking for growth in small-cap stocks like Tikkurila Oyj (HEL:TIK1V), with a market cap of €657m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into TIK1V here.

TIK1V’s Debt (And Cash Flows)

TIK1V’s debt levels surged from €107m to €121m over the last 12 months – this includes long-term debt. With this rise in debt, TIK1V’s cash and short-term investments stands at €35m , ready to be used for running the business. On top of this, TIK1V has produced €48m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 39%, signalling that TIK1V’s operating cash is sufficient to cover its debt.

Does TIK1V’s liquid assets cover its short-term commitments?

With current liabilities at €169m, the company has been able to meet these commitments with a current assets level of €220m, leading to a 1.3x current account ratio. 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.

HLSE:TIK1V Historical Debt, April 15th 2019
HLSE:TIK1V Historical Debt, April 15th 2019

Does TIK1V face the risk of succumbing to its debt-load?

With debt reaching 81% of equity, TIK1V may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if TIK1V’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 TIK1V, the ratio of 89.1x 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.

Next Steps:

Although TIK1V’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how TIK1V has been performing in the past. You should continue to research Tikkurila Oyj to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for TIK1V’s future growth? Take a look at our free research report of analyst consensus for TIK1V’s outlook.
  2. Valuation: What is TIK1V 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 TIK1V 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.