While small-cap stocks, such as Telephone and Data Systems, Inc. (NYSE:TDS) with its market cap of US$3.6b, 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, since poor capital management may bring about 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, this is just a partial view of the stock, and I suggest you dig deeper yourself into TDS here.
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TDS’s Debt (And Cash Flows)
TDS's debt levels surged from US$2.5b to US$3.5b over the last 12 months , which includes long-term debt. With this rise in debt, TDS currently has US$976m remaining in cash and short-term investments to keep the business going. Moreover, TDS has generated US$1.1b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 33%, signalling that TDS’s debt is appropriately covered by operating cash.
Can TDS pay its short-term liabilities?
At the current liabilities level of US$965m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.42x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Wireless Telecom companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can TDS service its debt comfortably?
With debt reaching 65% of equity, TDS may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TDS's case, the ratio of 1.45x 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.
Although TDS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around TDS's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure TDS has company-specific issues impacting its capital structure decisions. I suggest you continue to research Telephone and Data Systems to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TDS’s future growth? Take a look at our free research report of analyst consensus for TDS’s outlook.
- Valuation: What is TDS 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 TDS 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.
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