TriMas Corporation (NASDAQ:TRS) is a small-cap stock with a market capitalization of US$1.5b. 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? 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. The following basic checks can help you get a picture of the company’s balance sheet strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into TRS here.
TRS’s Debt (And Cash Flows)
TRS’s debt level has been constant at around US$294m over the previous year which accounts for long term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$108m , ready to be used for running the business. Additionally, TRS has generated cash from operations of US$129m over the same time period, resulting in an operating cash to total debt ratio of 44%, signalling that TRS’s current level of operating cash is high enough to cover debt.
Can TRS pay its short-term liabilities?
At the current liabilities level of US$142m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.91x. The current ratio is calculated by dividing current assets by current liabilities. For Machinery 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.
Is TRS’s debt level acceptable?
With a debt-to-equity ratio of 47%, TRS 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 TRS 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 TRS’s, case, the ratio of 9.45x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving TRS ample headroom to grow its debt facilities.
Although TRS’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 TRS has company-specific issues impacting its capital structure decisions. I suggest you continue to research TriMas to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TRS’s future growth? Take a look at our free research report of analyst consensus for TRS’s outlook.
- Valuation: What is TRS 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 TRS 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.