Are TechTarget, Inc.’s (NASDAQ:TTGT) Interest Costs Too High?

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Investors are always looking for growth in small-cap stocks like TechTarget, Inc. (NASDAQ:TTGT), with a market cap of US$596m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into TTGT here.

TTGT’s Debt (And Cash Flows)

TTGT’s debt levels surged from US$30m to US$56m over the last 12 months , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$39m to keep the business going. On top of this, TTGT has generated US$30m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 53%, meaning that TTGT’s current level of operating cash is high enough to cover debt.

Can TTGT meet its short-term obligations with the cash in hand?

With current liabilities at US$15m, it seems that the business has been able to meet these obligations given the level of current assets of US$68m, with a current ratio of 4.66x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.

NasdaqGM:TTGT Historical Debt, May 13th 2019
NasdaqGM:TTGT Historical Debt, May 13th 2019

Can TTGT service its debt comfortably?

With a debt-to-equity ratio of 41%, TTGT can be considered as an above-average leveraged company. 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 TTGT 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 TTGT’s, case, the ratio of 14.48x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as TTGT’s high interest coverage is seen as responsible and safe practice.

Next Steps:

TTGT’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. This is only a rough assessment of financial health, and I’m sure TTGT has company-specific issues impacting its capital structure decisions. You should continue to research TechTarget to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for TTGT’s future growth? Take a look at our free research report of analyst consensus for TTGT’s outlook.
  2. Valuation: What is TTGT 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 TTGT is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.