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The Container Store Group, Inc. (NYSE:TCS) is a small-cap stock with a market capitalization of US$351m. 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? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to 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, these checks don't give you a full picture, so I suggest you dig deeper yourself into TCS here.
Does TCS Produce Much Cash Relative To Its Debt?
Over the past year, TCS has maintained its debt levels at around US$305m – this includes long-term debt. At this current level of debt, TCS currently has US$21m remaining in cash and short-term investments to keep the business going. Moreover, TCS has generated cash from operations of US$41m during the same period of time, resulting in an operating cash to total debt ratio of 13%, indicating that TCS’s operating cash is less than its debt.
Can TCS pay its short-term liabilities?
Looking at TCS’s US$136m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$186m, leading to a 1.37x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. 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.
Can TCS service its debt comfortably?
TCS is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether TCS 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 TCS's, case, the ratio of 2.07x 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.
TCS’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. I admit this is a fairly basic analysis for TCS's financial health. Other important fundamentals need to be considered alongside. You should continue to research Container Store Group to get a better picture of the small-cap by looking at:
- 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.
- 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.
- 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 firstname.lastname@example.org. 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.