Is Total Produce plc's (ISE:T7O) Balance Sheet A Threat To Its Future?

Total Produce plc (ISE:T7O) is a small-cap stock with a market capitalization of €861.43m. 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? Consumer Retailing businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into T7O here.

Does T7O produce enough cash relative to debt?

T7O's debt levels surged from €178.25m to €213.44m over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, T7O's cash and short-term investments stands at €100.25m for investing into the business. Moreover, T7O has produced cash from operations of €46.56m in the last twelve months, resulting in an operating cash to total debt ratio of 21.82%, indicating that T7O’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In T7O’s case, it is able to generate 0.22x cash from its debt capital.

Does T7O’s liquid assets cover its short-term commitments?

Looking at T7O’s most recent €522.87m liabilities, it appears that the company has been able to meet these commitments with a current assets level of €564.21m, leading to a 1.08x current account ratio. For Consumer Retailing companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does T7O face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 62.85%, T7O can be considered as an above-average 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 check to see whether T7O is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In T7O's, case, the ratio of 11.7x 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:

At its current level of cash flow coverage, T7O has room for improvement to better cushion for events which may require debt repayment. However, 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 T7O has company-specific issues impacting its capital structure decisions. I suggest you continue to research Total Produce to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for T7O’s future growth? Take a look at our free research report of analyst consensus for T7O’s outlook.
2. Valuation: What is T7O 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 T7O 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.