While small-cap stocks, such as Taitron Components Incorporated (NASDAQ:TAIT) with its market cap of US$9.50m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Electronic industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into TAIT here.
How does TAIT’s operating cash flow stack up against its debt?
Over the past year, TAIT has reduced its debt from US$1.00m to US$500.00k , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$3.59m , ready to deploy into the business. Moreover, TAIT has generated US$1.25m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 249.40%, indicating that TAIT’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TAIT’s case, it is able to generate 2.49x cash from its debt capital.
Can TAIT pay its short-term liabilities?
At the current liabilities level of US$708.00k liabilities, the company has been able to meet these commitments with a current assets level of US$8.85m, leading to a 12.5x current account ratio. Though, anything above 3x is considered high and could mean that TAIT has too much idle capital in low-earning investments.
Can TAIT service its debt comfortably?TAIT’s level of debt is low relative to its total equity, at 4.25%. TAIT is not taking on too much debt commitment, which may be constraining for future growth. We can test if TAIT’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 TAIT, the ratio of 15.77x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
TAIT has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how TAIT has been performing in the past. I recommend you continue to research Taitron Components to get a more holistic view of the stock by looking at:
- Valuation: What is TAIT 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 TAIT is currently mispriced by the market.
- Historical Performance: What has TAIT’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.
- 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.