What Investors Should Know About Intertape Polymer Group Inc’s (TSE:ITP) Financial Strength
While small-cap stocks, such as Intertape Polymer Group Inc (TSE:ITP) with its market cap of CA$1.1b, 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into ITP here.
How does ITP’s operating cash flow stack up against its debt?
ITP’s debt levels surged from US$294m to US$333m over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, ITP currently has US$14m remaining in cash and short-term investments , ready to deploy into the business. Additionally, ITP has produced US$90m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 27%, meaning that ITP’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ITP’s case, it is able to generate 0.27x cash from its debt capital.
Can ITP meet its short-term obligations with the cash in hand?
Looking at ITP’s most recent US$129m liabilities, the company has been able to meet these commitments with a current assets level of US$315m, leading to a 2.44x current account ratio. Generally, for Packaging companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is ITP’s debt level acceptable?
With total debt exceeding equities, ITP is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether ITP 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 ITP’s, case, the ratio of 7.95x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ITP ample headroom to grow its debt facilities.
Next Steps:
Although ITP’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 ITP’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 ITP has company-specific issues impacting its capital structure decisions. I recommend you continue to research Intertape Polymer Group to get a better picture of the small-cap by looking at:
Valuation: What is ITP 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 ITP is currently mispriced by the market.
Historical Performance: What has ITP’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.
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.
