While small-cap stocks, such as Ten Entertainment Group plc (LON:TEG) with its market cap of UK£144m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into TEG here.
How much cash does TEG generate through its operations?
Over the past year, TEG has ramped up its debt from UK£11m to UK£15m , which is mainly comprised of near term debt. With this rise in debt, TEG currently has UK£7.2m remaining in cash and short-term investments , ready to deploy into the business. On top of this, TEG has produced UK£15m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 102%, indicating that TEG’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TEG’s case, it is able to generate 1.02x cash from its debt capital.
Can TEG pay its short-term liabilities?
At the current liabilities level of UK£24m, it appears that the company may not be able to easily meet these obligations given the level of current assets of UK£12m, with a current ratio of 0.51x.
Can TEG service its debt comfortably?
With debt at 30% of equity, TEG may be thought of as appropriately levered. This range is considered safe as TEG is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if TEG’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 TEG, the ratio of 27.98x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as TEG’s high interest coverage is seen as responsible and safe practice.
TEG has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Though its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how TEG has been performing in the past. I recommend you continue to research Ten Entertainment Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TEG’s future growth? Take a look at our free research report of analyst consensus for TEG’s outlook.
- Valuation: What is TEG 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 TEG 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 past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.