Investors are always looking for growth in small-cap stocks like TravelCenters of America LLC (NASDAQ:TA), with a market cap of US$158m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Specialty Retail industry facing headwinds from current disruption, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into TA here.
Does TA produce enough cash relative to debt?
TA has sustained its debt level by about US$344m over the last 12 months which accounts for long term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$86m for investing into the business. Moreover, TA has generated cash from operations of US$112m over the same time period, resulting in an operating cash to total debt ratio of 33%, meaning that TA’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In TA’s case, it is able to generate 0.33x cash from its debt capital.
Does TA’s liquid assets cover its short-term commitments?
With current liabilities at US$431m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.89x. Generally, for Specialty Retail companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does TA face the risk of succumbing to its debt-load?
With debt reaching 75% of equity, TA may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since TA is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although TA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around TA’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how TA has been performing in the past. I suggest you continue to research TravelCenters of America to get a more holistic view of the small-cap by looking at:
- 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.
- Valuation: What is TA 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 TA 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.