Is Tri-Star Resources plc's (LON:TSTR) Balance Sheet Strong Enough To Weather A Storm?
While small-cap stocks, such as Tri-Star Resources plc (LON:TSTR) with its market cap of UK£41m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that TSTR is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into TSTR here.
Does TSTR produce enough cash relative to debt?
In the previous 12 months, TSTR's rose by about UK£3m made up of predominantly near term debt. With this increase in debt, TSTR currently has UK£280k remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 take a look at some of TSTR’s operating efficiency ratios such as ROA here.
Can TSTR pay its short-term liabilities?
At the current liabilities level of UK£3m liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of UK£397k, leading to a current ratio of 0.14x.
Can TSTR service its debt comfortably?
TSTR is a relatively highly levered company with a debt-to-equity of 47%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since TSTR is currently loss-making, 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.
Next Steps:
At its current level of cash flow coverage, TSTR has room for improvement to better cushion for events which may require debt repayment. Furthermore, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for TSTR's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Tri-Star Resources to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TSTR’s future growth? Take a look at our free research report of analyst consensus for TSTR’s outlook.
- Historical Performance: What has TSTR's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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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