Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Tabcorp Holdings Limited (ASX:TAH), with a market cap of AU$9.8b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine TAH’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into TAH here.
TAH’s Debt (And Cash Flows)
Over the past year, TAH has maintained its debt levels at around AU$3.8b – this includes long-term debt. At this current level of debt, TAH's cash and short-term investments stands at AU$414m , ready to be used for running the business. Additionally, TAH has produced AU$446m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 12%, meaning that TAH’s current level of operating cash is not high enough to cover debt.
Can TAH meet its short-term obligations with the cash in hand?
Looking at TAH’s AU$1.5b in current liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.51x. The current ratio is the number you get when you divide current assets by current liabilities.
Can TAH service its debt comfortably?
With debt reaching 53% of equity, TAH may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if TAH’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 TAH, the ratio of 3.19x 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.
TAH’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. But, its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I'm sure TAH has company-specific issues impacting its capital structure decisions. I recommend you continue to research Tabcorp Holdings to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TAH’s future growth? Take a look at our free research report of analyst consensus for TAH’s outlook.
- Valuation: What is TAH 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 TAH 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.