While small-cap stocks, such as TPI Composites Inc (NASDAQ:TPIC) with its market cap of US$778.09M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I suggest you dig deeper yourself into TPIC here.
Does TPIC generate an acceptable amount of cash through operations?
Over the past year, TPIC has maintained its debt levels at around US$121.39M – this includes both the current and long-term debt. At this constant level of debt, TPIC currently has US$153.70M remaining in cash and short-term investments , ready to deploy into the business. Additionally, TPIC has produced cash from operations of US$82.66M over the same time period, resulting in an operating cash to total debt ratio of 68.10%, signalling that TPIC’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 TPIC’s case, it is able to generate 0.68x cash from its debt capital.
Does TPIC’s liquid assets cover its short-term commitments?
Looking at TPIC’s most recent US$322.59M liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$432.97M, leading to a 1.34x current account ratio. Usually, for Electrical 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.
Can TPIC service its debt comfortably?
With debt reaching 75.57% of equity, TPIC may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether TPIC 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 TPIC’s, case, the ratio of 5.89x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving TPIC ample headroom to grow its debt facilities.
TPIC’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 TPIC’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how TPIC has been performing in the past. I suggest you continue to research TPI Composites to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TPIC’s future growth? Take a look at our free research report of analyst consensus for TPIC’s outlook.
- Valuation: What is TPIC 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 TPIC 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 pass 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.