Investors are always looking for growth in small-cap stocks like Telford Homes Plc (AIM:TEF), with a market cap of £321.70M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Consumer Durables industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into TEF here.
How does TEF’s operating cash flow stack up against its debt?
Over the past year, TEF has ramped up its debt from £39.0M to £54.9M – this includes both the current and long-term debt. With this increase in debt, TEF currently has £38.6M remaining in cash and short-term investments , ready to deploy into the business. Moreover, TEF has generated cash from operations of £14.3M over the same time period, resulting in an operating cash to total debt ratio of 25.98%, meaning that TEF’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TEF’s case, it is able to generate 0.26x cash from its debt capital.
Does TEF’s liquid assets cover its short-term commitments?
Looking at TEF’s most recent £206.6M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.77x. Usually, for Consumer Durables companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can TEF service its debt comfortably?
TEF is a relatively highly levered company with a debt-to-equity of 45.96%. 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 TEF 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 TEF’s, case, the ratio of 17.5x 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.
TEF’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure TEF has company-specific issues impacting its capital structure decisions. I suggest you continue to research Telford Homes to get a better picture of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for TEF’s future growth? Take a look at our free research report of analyst consensus for TEF’s outlook.
2. Valuation: What is TEF 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 TEF is currently mispriced by the market.
3. 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.