While small-cap stocks, such as Public Joint Stock Company Territorial Generation Company No. 14 (MCX:TGKN) with its market cap of RUруб6.8b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, 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, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into TGKN here.
How does TGKN’s operating cash flow stack up against its debt?
TGKN has shrunken its total debt levels in the last twelve months, from RUруб3.6b to RUруб2.9b , which also accounts for long term debt. With this debt repayment, TGKN’s cash and short-term investments stands at RUруб117m , ready to deploy into the business. Additionally, TGKN has generated cash from operations of RUруб1.8b during the same period of time, leading to an operating cash to total debt ratio of 62%, indicating that TGKN’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TGKN’s case, it is able to generate 0.62x cash from its debt capital.
Can TGKN meet its short-term obligations with the cash in hand?
At the current liabilities level of RUруб4.4b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.51x.
Can TGKN service its debt comfortably?
With debt reaching 50% of equity, TGKN may be thought of as relatively highly levered. 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 TGKN’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 TGKN, the ratio of 1.11x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
Although TGKN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure TGKN has company-specific issues impacting its capital structure decisions. You should continue to research Territorial Generation Company No. 14 to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TGKN’s future growth? Take a look at our free research report of analyst consensus for TGKN’s outlook.
- Valuation: What is TGKN 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 TGKN is currently mispriced by the market.
- 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 editorial-team@simplywallst.com.