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Tucows Inc. (NASDAQ:TCX) is a small-cap stock with a market capitalization of US$875m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into TCX here.
TCX’s Debt (And Cash Flows)
Over the past year, TCX has reduced its debt from US$77m to US$65m – this includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$13m to keep the business going. Moreover, TCX has produced US$37m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 58%, indicating that TCX’s debt is appropriately covered by operating cash.
Can TCX pay its short-term liabilities?
With current liabilities at US$165m, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$132m, with a current ratio of 0.8x. The current ratio is the number you get when you divide current assets by current liabilities.
Does TCX face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 81%, TCX can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether TCX 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 TCX's, case, the ratio of 8.02x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although TCX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I'm sure TCX has company-specific issues impacting its capital structure decisions. You should continue to research Tucows to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TCX’s future growth? Take a look at our free research report of analyst consensus for TCX’s outlook.
- Valuation: What is TCX 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 TCX 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.