How Financially Strong Is Treatt plc (LON:TET)?

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While small-cap stocks, such as Treatt plc (LON:TET) with its market cap of UK£251m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into TET here.

Does TET produce enough cash relative to debt?

TET has built up its total debt levels in the last twelve months, from UK£15m to UK£22m – this includes long-term debt. With this increase in debt, TET currently has UK£32m remaining in cash and short-term investments , ready to deploy into the business. On top of this, TET has generated UK£603k in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 2.7%, signalling that TET’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 TET’s case, it is able to generate 0.027x cash from its debt capital.

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

With current liabilities at UK£36m, it seems that the business has been able to meet these commitments with a current assets level of UK£102m, leading to a 2.86x current account ratio. Generally, for Chemicals companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

LSE:TET Historical Debt February 9th 19
LSE:TET Historical Debt February 9th 19

Is TET’s debt level acceptable?

With debt at 27% of equity, TET may be thought of as appropriately levered. TET is not taking on too much debt commitment, which may be constraining for future growth. We can test if TET’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 TET, the ratio of 74.48x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as TET’s high interest coverage is seen as responsible and safe practice.

Next Steps:

TET has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, 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 TET has company-specific issues impacting its capital structure decisions. You should continue to research Treatt to get a more holistic view of the stock by looking at:

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