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How Financially Strong Is Tile Shop Holdings Inc (NASDAQ:TTS)?

Austin Wood

Investors are always looking for growth in small-cap stocks like Tile Shop Holdings Inc (NASDAQ:TTS), with a market cap of US$416.4m. However, an important fact which most ignore is: how financially healthy is the business? Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into TTS here.

Does TTS produce enough cash relative to debt?

TTS’s debt levels surged from US$19.5m to US$30.0m over the last 12 months – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$9.9m for investing into the business. Additionally, TTS has generated US$30.1m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 101%, indicating that TTS’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 TTS’s case, it is able to generate 1.01x cash from its debt capital.

Can TTS meet its short-term obligations with the cash in hand?

With current liabilities at US$67.7m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.83x. Usually, for Specialty Retail companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NasdaqGS:TTS Historical Debt September 25th 18

Does TTS face the risk of succumbing to its debt-load?

With debt at 20.1% of equity, TTS may be thought of as appropriately levered. This range is considered safe as TTS is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if TTS’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 TTS, the ratio of 8.24x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as TTS’s high interest coverage is seen as responsible and safe practice.

Next Steps:

TTS has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how TTS has been performing in the past. I recommend you continue to research Tile Shop Holdings to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for TTS’s future growth? Take a look at our free research report of analyst consensus for TTS’s outlook.
  2. Historical Performance: What has TTS’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.
  3. 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 editorial-team@simplywallst.com.