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Is Liberty Tax Inc’s (NASDAQ:TAX) Balance Sheet Strong Enough To Weather A Storm?

Andy Nguyen

Investors are always looking for growth in small-cap stocks like Liberty Tax Inc (NASDAQ:TAX), with a market cap of US$147.94M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, 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, since I only look at basic financial figures, I recommend you dig deeper yourself into TAX here.

How does TAX’s operating cash flow stack up against its debt?

TAX has built up its total debt levels in the last twelve months, from US$23.44M to US$26.20M , which is made up of current and long term debt. With this growth in debt, TAX currently has US$16.43M remaining in cash and short-term investments for investing into the business. On top of this, TAX has produced US$32.45M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 123.84%, meaning that TAX’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TAX’s case, it is able to generate 1.24x cash from its debt capital.

Can TAX meet its short-term obligations with the cash in hand?

At the current liabilities level of US$53.17M liabilities, the company has been able to meet these commitments with a current assets level of US$115.67M, leading to a 2.18x current account ratio. For Consumer Services companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NasdaqGS:TAX Historical Debt Jun 1st 18

Is TAX’s debt level acceptable?

With a debt-to-equity ratio of 41.22%, TAX can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if TAX’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For TAX, the ratio of 12.7x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving TAX ample headroom to grow its debt facilities.

Next Steps:

Although TAX’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for TAX’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Liberty Tax to get a better picture of the small-cap by looking at:

  1. Valuation: What is TAX 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 TAX is currently mispriced by the market.
  2. Historical Performance: What has TAX’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.
  3. 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.