While small-cap stocks, such as Tredegar Corporation (NYSE:TG) with its market cap of US$532m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes 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’d encourage you to dig deeper yourself into TG here.
Does TG Produce Much Cash Relative To Its Debt?
TG’s debt levels have fallen from US$152m to US$102m over the last 12 months – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$34m , ready to be used for running the business. Additionally, TG has generated US$98m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 96%, meaning that TG’s debt is appropriately covered by operating cash.
Can TG meet its short-term obligations with the cash in hand?
At the current liabilities level of US$155m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.73x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Chemicals companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can TG service its debt comfortably?
TG’s level of debt is appropriate relative to its total equity, at 29%. This range is considered safe as TG is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if TG’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 TG, the ratio of 12.51x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving TG ample headroom to grow its debt facilities.
Next Steps:
TG’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for TG’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Tredegar to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TG’s future growth? Take a look at our free research report of analyst consensus for TG’s outlook.
- Valuation: What is TG 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 TG 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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