Titan Machinery Inc (NASDAQ:TITN) is a small-cap stock with a market capitalization of US$355.67m. 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? Given that TITN is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into TITN here.
How does TITN’s operating cash flow stack up against its debt?
TITN has sustained its debt level by about US$346.36m over the last 12 months made up of current and long term debt. At this stable level of debt, TITN currently has US$53.40m remaining in cash and short-term investments for investing into the business. Additionally, TITN has produced cash from operations of US$95.81m in the last twelve months, resulting in an operating cash to total debt ratio of 27.66%, signalling that TITN’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In TITN’s case, it is able to generate 0.28x cash from its debt capital.
Does TITN’s liquid assets cover its short-term commitments?
With current liabilities at US$328.29m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.83x. Usually, for Trade Distributors companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does TITN face the risk of succumbing to its debt-load?Since total debt levels have outpaced equities, TITN is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since TITN is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for TITN’s financial health. Other important fundamentals need to be considered alongside. I recommend 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.