While small-cap stocks, such as Tucows Inc (NASDAQ:TCX) with its market cap of US$681.77m, 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 Internet industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into TCX here.
How much cash does TCX generate through its operations?
TCX’s debt levels surged from US$10.25m to US$76.92m over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$18.05m , ready to deploy into the business. Additionally, TCX has generated US$31.90m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 41.47%, meaning that TCX’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TCX’s case, it is able to generate 0.41x cash from its debt capital.
Does TCX’s liquid assets cover its short-term commitments?
Looking at TCX’s most recent US$178.56m liabilities, it appears that the company is not able to meet these obligations given the level of current assets of US$153.86m, with a current ratio of 0.86x below the prudent level of 3x.
Does TCX face the risk of succumbing to its debt-load?
TCX is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if TCX’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 TCX, the ratio of 8.37x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving TCX ample headroom to grow its debt facilities.
TCX’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. But, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how TCX has been performing in the past. I suggest you continue to research Tucows to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TCX’s future growth? Take a look at our free research report of analyst consensus for TCX’s outlook.
- Valuation: What is TCX 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 TCX 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.