What You Should Know About The Container Store Group, Inc.’s (NYSE:TCS) Financial Strength

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The Container Store Group, Inc. (NYSE:TCS) is a small-cap stock with a market capitalization of US$349m. 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? Understanding the company’s financial health becomes vital, 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. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into TCS here.

Does TCS Produce Much Cash Relative To Its Debt?

TCS has shrunk its total debt levels in the last twelve months, from US$285m to US$267m , which also accounts for long term debt. With this debt payback, TCS’s cash and short-term investments stands at US$7.4m , ready to be used for running the business. Additionally, TCS has produced US$55m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 21%, signalling that TCS’s current level of operating cash is high enough to cover debt.

Does TCS’s liquid assets cover its short-term commitments?

With current liabilities at US$141m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.16x. The current ratio is calculated by dividing current assets by current liabilities. For Specialty Retail companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

NYSE:TCS Historical Debt, June 12th 2019
NYSE:TCS Historical Debt, June 12th 2019

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

With total debt exceeding equity, TCS is considered a highly levered 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 test if TCS’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 TCS, the ratio of 2.06x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

Although TCS’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. 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 TCS has company-specific issues impacting its capital structure decisions. I suggest you continue to research Container Store Group to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for TCS’s future growth? Take a look at our free research report of analyst consensus for TCS’s outlook.
  2. Valuation: What is TCS 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 TCS 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.