Investors are always looking for growth in small-cap stocks like TC PipeLines LP (NYSE:TCP), with a market cap of US$1.80B. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into TCP here.
Does TCP generate an acceptable amount of cash through operations?
Over the past year, TCP has ramped up its debt from US$1.91B to US$2.40B – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$33.00M , ready to deploy into the business. Additionally, TCP has generated US$376.00M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 15.65%, signalling that TCP’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TCP’s case, it is able to generate 0.16x cash from its debt capital.
Can TCP meet its short-term obligations with the cash in hand?
At the current liabilities level of US$100.00M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of US$90.00M, leading to a 0.9x current account ratio. which is under the appropriate industry ratio of 3x.
Is TCP’s debt level acceptable?
TCP is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether TCP 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 TCP’s, case, the ratio of 4.17x 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.Next Steps:
TCP’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how TCP has been performing in the past. I suggest you continue to research TC PipeLines to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TCP’s future growth? Take a look at our free research report of analyst consensus for TCP’s outlook.
- Valuation: What is TCP 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 TCP 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.