The Timken Company (NYSE:TKR) is a small-cap stock with a market capitalization of US$3.6b. 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? Assessing first and foremost the financial health 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, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into TKR here.
TKR’s Debt (And Cash Flows)
TKR’s debt levels surged from US$962m to US$1.7b over the last 12 months , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$154m , ready to be used for running the business. Additionally, TKR has generated US$333m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 20%, meaning that TKR’s operating cash is less than its debt.
Does TKR’s liquid assets cover its short-term commitments?
Looking at TKR’s US$686m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.53x. The current ratio is calculated by dividing current assets by current liabilities. For Machinery companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is TKR’s debt level acceptable?
TKR is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether TKR 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 TKR’s, case, the ratio of 9.14x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving TKR ample headroom to grow its debt facilities.
Although TKR’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 TKR’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 TKR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Timken to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TKR’s future growth? Take a look at our free research report of analyst consensus for TKR’s outlook.
- Valuation: What is TKR 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 TKR 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 email@example.com. 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.