Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as TriNet Group, Inc. (NYSE:TNET) with a market-capitalization of US$4.2b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine TNET’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into TNET here.
Does TNET Produce Much Cash Relative To Its Debt?
TNET's debt level has been constant at around US$413m over the previous year – this includes long-term debt. At this constant level of debt, TNET currently has US$282m remaining in cash and short-term investments , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can examine some of TNET’s operating efficiency ratios such as ROA here.
Can TNET pay its short-term liabilities?
Looking at TNET’s US$1.4b in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$1.6b, with a current ratio of 1.16x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Professional Services companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does TNET face the risk of succumbing to its debt-load?
Since total debt growth have outpaced equity growth, TNET is a highly leveraged company. 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 TNET’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 TNET, the ratio of 25.1x suggests that interest is comfortably 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.
TNET’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. Since there is also no concerns around TNET'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 TNET has company-specific issues impacting its capital structure decisions. You should continue to research TriNet Group to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TNET’s future growth? Take a look at our free research report of analyst consensus for TNET’s outlook.
- Valuation: What is TNET 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 TNET 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.
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