Is TravelCenters of America LLC’s (NASDAQ:TA) Balance Sheet Strong Enough To Weather A Storm?

TravelCenters of America LLC (NASDAQ:TA) is a small-cap stock with a market capitalization of US$136.00M. 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? Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into TA here.

How does TA’s operating cash flow stack up against its debt?

Over the past year, TA has maintained its debt levels at around US$343.48M made up of current and long term debt. At this stable level of debt, TA’s cash and short-term investments stands at US$36.08M for investing into the business. On top of this, TA has generated cash from operations of US$35.67M in the last twelve months, resulting in an operating cash to total debt ratio of 10.39%, signalling that TA’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TA’s case, it is able to generate 0.1x cash from its debt capital.

Can TA pay its short-term liabilities?

At the current liabilities level of US$327.11M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$398.52M, with a current ratio of 1.22x. For Specialty Retail companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NasdaqGS:TA Historical Debt Jun 7th 18
NasdaqGS:TA Historical Debt Jun 7th 18

Does TA face the risk of succumbing to its debt-load?

TA is a relatively highly levered company with a debt-to-equity of 61.58%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if TA’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 TA, the ratio of 0.2x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as TA’s low interest coverage already puts the company at higher risk of default.

Next Steps:

TA’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how TA has been performing in the past. I recommend you continue to research TravelCenters of America to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for TA’s future growth? Take a look at our free research report of analyst consensus for TA’s outlook.
  2. Historical Performance: What has TA’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  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.