Investors are always looking for growth in small-cap stocks like Titan Machinery Inc. (NASDAQ:TITN), with a market cap of US$399m. 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. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into TITN here.
How much cash does TITN generate through its operations?
Over the past year, TITN has maintained its debt levels at around US$408m including long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$52m , ready to deploy into the business. On top of this, TITN has generated US$52m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 13%, meaning that TITN’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TITN’s case, it is able to generate 0.13x cash from its debt capital.
Does TITN’s liquid assets cover its short-term commitments?
With current liabilities at US$449m, it appears that the company has been able to meet these commitments with a current assets level of US$668m, leading to a 1.49x current account ratio. Usually, for Trade Distributors companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does TITN face the risk of succumbing to its debt-load?
With total debt exceeding equities, TITN is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether TITN 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 TITN’s, case, the ratio of 1.81x 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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure TITN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Titan Machinery to get a better picture 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.
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 firstname.lastname@example.org.