Tinexta S.p.A. (BIT:TNXT) is a small-cap stock with a market capitalization of €486m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into TNXT here.
Does TNXT Produce Much Cash Relative To Its Debt?
Over the past year, TNXT has ramped up its debt from €146m to €168m – this includes long-term debt. With this rise in debt, TNXT's cash and short-term investments stands at €43m , ready to be used for running the business. On top of this, TNXT has produced €43m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 26%, signalling that TNXT’s debt is appropriately covered by operating cash.
Can TNXT pay its short-term liabilities?
Looking at TNXT’s €194m in current liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.74x. The current ratio is the number you get when you divide current assets by current liabilities.
Is TNXT’s debt level acceptable?
Since total debt levels exceed equity, TNXT is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether TNXT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TNXT's, case, the ratio of 24.04x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving TNXT ample headroom to grow its debt facilities.
TNXT’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure TNXT has company-specific issues impacting its capital structure decisions. You should continue to research Tinexta to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TNXT’s future growth? Take a look at our free research report of analyst consensus for TNXT’s outlook.
- Valuation: What is TNXT 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 TNXT 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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