Investors are always looking for growth in small-cap stocks like Troax Group AB (publ) (STO:TROAX), with a market cap of kr6.4b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into TROAX here.
Does TROAX Produce Much Cash Relative To Its Debt?
Over the past year, TROAX has ramped up its debt from €69m to €78m , which includes long-term debt. With this growth in debt, TROAX’s cash and short-term investments stands at €23m to keep the business going. On top of this, TROAX has generated €26m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 33%, signalling that TROAX’s debt is appropriately covered by operating cash.
Does TROAX’s liquid assets cover its short-term commitments?
Looking at TROAX’s €31m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.33x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Machinery companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is TROAX’s debt level acceptable?
With a debt-to-equity ratio of 95%, TROAX can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether TROAX 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 TROAX’s, case, the ratio of 41x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving TROAX ample headroom to grow its debt facilities.
TROAX’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around TROAX’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure TROAX has company-specific issues impacting its capital structure decisions. I suggest you continue to research Troax Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TROAX’s future growth? Take a look at our free research report of analyst consensus for TROAX’s outlook.
- Valuation: What is TROAX 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 TROAX 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.
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