Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Trinseo SA (NYSE:TSE), with a market cap of US$3.12b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at TSE’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into TSE here. See our latest analysis for Trinseo
How much cash does TSE generate through its operations?
TSE’s debt level has been constant at around US$1.20b over the previous year comprising of short- and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$432.80m , ready to deploy into the business. Additionally, TSE has generated US$391.30m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 32.60%, meaning that TSE’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TSE’s case, it is able to generate 0.33x cash from its debt capital.
Can TSE pay its short-term liabilities?
At the current liabilities level of US$626.60m liabilities, the company has been able to meet these obligations given the level of current assets of US$1.65b, with a current ratio of 2.63x. For Chemicals companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does TSE face the risk of succumbing to its debt-load?
With total debt exceeding equities, TSE is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In TSE’s case, the ratio of 6.05x suggests that interest is appropriately 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.
TSE’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 TSE’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how TSE has been performing in the past. You should continue to research Trinseo to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TSE’s future growth? Take a look at our free research report of analyst consensus for TSE’s outlook.
- Valuation: What is TSE 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 TSE 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.
To help readers see pass 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.