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Investors are always looking for growth in small-cap stocks like Titan Machinery Inc. (NASDAQ:TITN), with a market cap of US$354m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into TITN here.
Does TITN Produce Much Cash Relative To Its Debt?
TITN’s debt levels surged from US$407m to US$560m over the last 12 months , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$63m , ready to be used for running the business. Additionally, TITN has produced cash from operations of US$76m in the last twelve months, resulting in an operating cash to total debt ratio of 14%, indicating that TITN’s current level of operating cash is not high enough to cover debt.
Can TITN meet its short-term obligations with the cash in hand?
At the current liabilities level of US$526m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.39x. The current ratio is the number you get when you divide current assets by current liabilities. For Trade Distributors companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can TITN service its debt comfortably?
With total debt exceeding equity, TITN is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TITN’s case, the ratio of 2.51x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as TITN’s low interest coverage already puts the company at higher risk of default.
Although TITN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around TITN’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for TITN’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Titan Machinery to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TITN’s future growth? Take a look at our free research report of analyst consensus for TITN’s outlook.
- Valuation: What is TITN 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 TITN 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.