What You Must Know About Toromont Industries Ltd’s (TSX:TIH) Financial Health
Mid-caps stocks, like Toromont Industries Ltd (TSX:TIH) with a market capitalization of CAD CA$4.53B, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. I’ve put together a small checklist, which I believe provides a ballpark estimate of their financial health status. Check out our latest analysis for Toromont Industries
Is TIH’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. TIH’s debt-to-equity ratio stands at 15.70%, which means its debt level does not pose a threat to its operations right now. We can test if TIH’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. In TIH’s case, its interest is excessively covered by its earnings as the ratio sits at 77.64x. Lenders may be less hesitant to lend out more funding as TIH’s high interest coverage is seen as responsible and safe practice.
Can TIH meet its short-term obligations with the cash in hand?
A different measure of financial health is measured by its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. In order to measure liquidity, we must compare TIH’s current assets with its upcoming liabilities. Our analysis shows that TIH is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Next Steps:
Are you a shareholder? TIH’s relatively safe debt levels is even more impressive due to its ability to generate high cash flow, which illustrates operating efficiency. Given that TIH’s financial situation may change, I suggest researching market expectations for TIH’s future growth on our free analysis platform.
Are you a potential investor? Although understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. TIH’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
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.
