What You Must Know About TravelCenters of America LLC’s (NASDAQ:TA) Financial Strength
Investors are always looking for growth in small-cap stocks like TravelCenters of America LLC (NASDAQ:TA), with a market cap of US$156m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Specialty Retail industry facing headwinds from current disruption, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into TA here.
Does TA produce enough cash relative to debt?
TA’s debt level has been constant at around US$344m over the previous year – this includes long-term debt. At this constant level of debt, TA currently has US$86m remaining in cash and short-term investments for investing into the business. Additionally, TA has generated cash from operations of US$112m during the same period of time, resulting in an operating cash to total debt ratio of 33%, indicating that TA’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In TA’s case, it is able to generate 0.33x cash from its debt capital.
Does TA’s liquid assets cover its short-term commitments?
At the current liabilities level of US$431m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.89x. For Specialty Retail companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does TA face the risk of succumbing to its debt-load?
With debt reaching 75% of equity, TA may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since TA is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although TA’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for TA’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research TravelCenters of America to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for TA’s future growth? Take a look at our free research report of analyst consensus for TA’s outlook.
Valuation: What is TA 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 TA 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 editorial-team@simplywallst.com.
