While small-cap stocks, such as InnoTec TSS AG (FRA:TSS) with its market cap of €100m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into TSS here.
How does TSS’s operating cash flow stack up against its debt?
Over the past year, TSS has ramped up its debt from €9.9m to €13m , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at €16m for investing into the business. Moreover, TSS has generated cash from operations of €12m during the same period of time, resulting in an operating cash to total debt ratio of 94%, meaning that TSS’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TSS’s case, it is able to generate 0.94x cash from its debt capital.
Does TSS’s liquid assets cover its short-term commitments?
With current liabilities at €12m, it seems that the business has been able to meet these obligations given the level of current assets of €49m, with a current ratio of 4.03x. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Does TSS face the risk of succumbing to its debt-load?
TSS’s level of debt is appropriate relative to its total equity, at 16%. This range is considered safe as TSS is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether TSS 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 TSS’s, case, the ratio of 122x 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.
TSS has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how TSS has been performing in the past. I recommend you continue to research InnoTec TSS to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TSS’s future growth? Take a look at our free research report of analyst consensus for TSS’s outlook.
- Historical Performance: What has TSS’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.
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.