Investors are always looking for growth in small-cap stocks like Teradata Corporation (NYSE:TDC), with a market cap of US$4.0b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into TDC here.
Does TDC Produce Much Cash Relative To Its Debt?
TDC's debt levels surged from US$524m to US$633m over the last 12 months – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$723m , ready to be used for running the business. Moreover, TDC has generated cash from operations of US$229m over the same time period, resulting in an operating cash to total debt ratio of 36%, meaning that TDC’s operating cash is sufficient to cover its debt.
Does TDC’s liquid assets cover its short-term commitments?
At the current liabilities level of US$914m, it appears that the company has been able to meet these commitments with a current assets level of US$1.3b, leading to a 1.42x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Software companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is TDC’s debt level acceptable?
TDC is a highly-leveraged company with debt exceeding equity by over 100%. 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 TDC 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 TDC's, case, the ratio of 5.22x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving TDC ample headroom to grow its debt facilities.
TDC’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. Since there is also no concerns around TDC'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 TDC has company-specific issues impacting its capital structure decisions. You should continue to research Teradata to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TDC’s future growth? Take a look at our free research report of analyst consensus for TDC’s outlook.
- Valuation: What is TDC 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 TDC 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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