Speedway Motorsports, Inc. (NYSE:TRK) is a small-cap stock with a market capitalization of US$656m. 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, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into TRK here.
How does TRK’s operating cash flow stack up against its debt?
TRK’s debt levels have fallen from US$232m to US$201m over the last 12 months – this includes long-term debt. With this debt payback, TRK currently has US$81m remaining in cash and short-term investments , ready to deploy into the business. On top of this, TRK has produced US$85m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 42%, indicating that TRK’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TRK’s case, it is able to generate 0.42x cash from its debt capital.
Can TRK meet its short-term obligations with the cash in hand?
Looking at TRK’s US$79m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.73x. For Hospitality companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is TRK’s debt level acceptable?
With debt at 21% of equity, TRK may be thought of as appropriately levered. TRK is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if TRK’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For TRK, the ratio of 7.04x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as TRK’s high interest coverage is seen as responsible and safe practice.
TRK’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure TRK has company-specific issues impacting its capital structure decisions. I suggest you continue to research Speedway Motorsports to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TRK’s future growth? Take a look at our free research report of analyst consensus for TRK’s outlook.
- Valuation: What is TRK 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 TRK 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 email@example.com.