What You Must Know About Tower International Inc’s (NYSE:TOWR) Financial Strength
Investors are always looking for growth in small-cap stocks like Tower International Inc (NYSE:TOWR), with a market cap of US$700.23m. However, an important fact which most ignore is: how financially healthy is the business? 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. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into TOWR here.
How much cash does TOWR generate through its operations?
Over the past year, TOWR has maintained its debt levels at around US$395.70m – this includes both the current and long-term debt. At this constant level of debt, TOWR’s cash and short-term investments stands at US$123.69m , ready to deploy into the business. Moreover, TOWR has produced US$167.21m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 42.26%, meaning that TOWR’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TOWR’s case, it is able to generate 0.42x cash from its debt capital.
Can TOWR meet its short-term obligations with the cash in hand?
Looking at TOWR’s most recent US$496.60m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$564.48m, with a current ratio of 1.14x. Usually, for Auto Components companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does TOWR face the risk of succumbing to its debt-load?
With total debt exceeding equities, TOWR is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether TOWR 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 TOWR’s, case, the ratio of 7.03x 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.
Next Steps:
Although TOWR’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around TOWR’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure TOWR has company-specific issues impacting its capital structure decisions. I recommend you continue to research Tower International to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for TOWR’s future growth? Take a look at our free research report of analyst consensus for TOWR’s outlook.
Valuation: What is TOWR 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 TOWR 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 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.
