Investors are always looking for growth in small-cap stocks like Tennant Company (NYSE:TNC), with a market cap of US$1.1b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about 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. Nevertheless, these checks don’t give you a full picture, so I suggest you dig deeper yourself into TNC here.
Does TNC Produce Much Cash Relative To Its Debt?
TNC’s debt levels have fallen from US$377m to US$355m over the last 12 months , which includes long-term debt. With this debt payback, TNC’s cash and short-term investments stands at US$86m , ready to be used for running the business. Moreover, TNC has generated cash from operations of US$80m in the last twelve months, leading to an operating cash to total debt ratio of 23%, meaning that TNC’s operating cash is sufficient to cover its debt.
Can TNC meet its short-term obligations with the cash in hand?
Looking at TNC’s US$249m in current liabilities, the company has been able to meet these commitments with a current assets level of US$469m, leading to a 1.88x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can TNC service its debt comfortably?
Since total debt levels exceed equity, TNC is a highly 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 TNC 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 TNC’s, case, the ratio of 3.23x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
TNC’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 TNC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Tennant to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TNC’s future growth? Take a look at our free research report of analyst consensus for TNC’s outlook.
- Valuation: What is TNC 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 TNC 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.
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