The size of Total System Services Inc (NYSE:TSS), a US$16b large-cap, often attracts investors seeking a reliable investment in the stock market. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the key to their continued success lies in its financial health. I will provide an overview of Total System Services’s financial liquidity and leverage to give you an idea of Total System Services’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into TSS here.
How much cash does TSS generate through its operations?
TSS’s debt levels surged from US$3.0b to US$3.9b over the last 12 months , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$485m , ready to deploy into the business. Moreover, TSS has produced US$950m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 24%, indicating that TSS’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TSS’s case, it is able to generate 0.24x cash from its debt capital.
Does TSS’s liquid assets cover its short-term commitments?
With current liabilities at US$467m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.57x. Usually, for IT companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can TSS service its debt comfortably?
Considering Total System Services’s total debt outweighs its equity, the company is deemed highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. 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. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In TSS’s case, the ratio of 5.46x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes TSS and other large-cap investments thought to be safe.
TSS’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for TSS’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Total System Services to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TSS’s future growth? Take a look at our free research report of analyst consensus for TSS’s outlook.
- Valuation: What is TSS 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 TSS 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.
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 firstname.lastname@example.org.