Stocks with market capitalization between $2B and $10B, such as Toromont Industries Ltd. (TSE:TIH) with a size of CA$5.6b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at TIH’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of Toromont Industries’s financial health, so you should conduct further analysis into TIH here.
TIH’s Debt (And Cash Flows)
TIH has shrunk its total debt levels in the last twelve months, from CA$896m to CA$646m , which also accounts for long term debt. With this debt repayment, TIH currently has CA$345m remaining in cash and short-term investments , ready to be used for running the business. Moreover, TIH has generated CA$506m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 78%, indicating that TIH’s operating cash is sufficient to cover its debt.
Can TIH meet its short-term obligations with the cash in hand?
With current liabilities at CA$1.1b, it appears that the company has been able to meet these obligations given the level of current assets of CA$1.8b, with a current ratio of 1.58x. The current ratio is calculated by dividing current assets by current liabilities. For Trade Distributors companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does TIH face the risk of succumbing to its debt-load?
TIH is a relatively highly levered company with a debt-to-equity of 49%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if TIH’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 TIH, the ratio of 17.01x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving TIH ample headroom to grow its debt facilities.
TIH’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. Since there is also no concerns around TIH's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for TIH's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Toromont Industries to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TIH’s future growth? Take a look at our free research report of analyst consensus for TIH’s outlook.
- Valuation: What is TIH 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 TIH 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 email@example.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.