Tutor Perini Corporation (NYSE:TPC) is a small-cap stock with a market capitalization of US$991m. 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? Evaluating financial health as part of your investment thesis is essential, 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. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into TPC here.
TPC’s Debt (And Cash Flows)
TPC has sustained its debt level by about US$762m over the last 12 months – this includes long-term debt. At this current level of debt, TPC currently has US$116m remaining in cash and short-term investments to keep the business going. On top of this, TPC has produced cash from operations of US$21m over the same time period, resulting in an operating cash to total debt ratio of 2.8%, signalling that TPC’s operating cash is less than its debt.
Does TPC’s liquid assets cover its short-term commitments?
At the current liabilities level of US$1.6b, the company has been able to meet these obligations given the level of current assets of US$3.2b, with a current ratio of 1.99x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Construction companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does TPC face the risk of succumbing to its debt-load?
With debt reaching 43% of equity, TPC may be thought of as relatively highly levered. 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 TPC 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 TPC's, case, the ratio of 3.02x 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.
TPC’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 TPC'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 TPC has been performing in the past. I recommend you continue to research Tutor Perini to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TPC’s future growth? Take a look at our free research report of analyst consensus for TPC’s outlook.
- Valuation: What is TPC 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 TPC 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 firstname.lastname@example.org. 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.