Tricorn Group plc (AIM:TCN) is a small-cap stock with a market capitalization of £7.43M. 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, since poor capital management may bring about 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. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into TCN here.
Does TCN generate enough cash through operations?
Over the past year, TCN has ramped up its debt from £3.8M to £4.1M . With this rise in debt, the current cash and short-term investment levels stands at £0.6M for investing into the business. Moreover, TCN has produced £0.6M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 14.83%, meaning that TCN’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TCN’s case, it is able to generate 0.15x cash from its debt capital.
Can TCN meet its short-term obligations with the cash in hand?
Looking at TCN’s most recent £7.5M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of £8.0M, with a current ratio of 1.07x. Usually, for Machinery companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does TCN face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 72.21%, TCN can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if TCN’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 TCN, the ratio of 2.06x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
TCN’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure TCN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Tricorn Group to get a better picture of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for TCN’s future growth? Take a look at our free research report of analyst consensus for TCN’s outlook.
- 2. Valuation: What is TCN 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 TCN 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.
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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.