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Speedway Motorsports, Inc. (NYSE:TRK) is a small-cap stock with a market capitalization of US$574m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into TRK here.
Does TRK Produce Much Cash Relative To Its Debt?
TRK has shrunk its total debt levels in the last twelve months, from US$227m to US$198m , which includes long-term debt. With this debt repayment, TRK's cash and short-term investments stands at US$81m , ready to be used for running the business. On top of this, TRK has generated US$90m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 46%, meaning that TRK’s debt is appropriately covered by operating cash.
Can TRK meet its short-term obligations with the cash in hand?
At the current liabilities level of US$71m, it appears that the company has been able to meet these commitments with a current assets level of US$121m, leading to a 1.7x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Hospitality companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does TRK face the risk of succumbing to its debt-load?
TRK’s level of debt is appropriate relative to its total equity, at 21%. TRK is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if TRK’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 TRK, the ratio of 5.65x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving TRK ample headroom to grow its debt facilities.
TRK’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for TRK's financial health. Other important fundamentals need to be considered alongside. You should continue to research Speedway Motorsports to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TRK’s future growth? Take a look at our free research report of analyst consensus for TRK’s outlook.
- Valuation: What is TRK 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 TRK 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.