Is Teranga Gold Corporation’s (TSE:TGZ) Balance Sheet A Threat To Its Future?
Teranga Gold Corporation (TSX:TGZ) is a small-cap stock with a market capitalization of CA$470.17M. 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? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into TGZ here.
How does TGZ’s operating cash flow stack up against its debt?
Over the past year, TGZ has maintained its debt levels at around US$14.31M comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$88.64M for investing into the business. Moreover, TGZ has produced US$71.38M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 498.91%, meaning that TGZ’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TGZ’s case, it is able to generate 4.99x cash from its debt capital.
Can TGZ pay its short-term liabilities?
Looking at TGZ’s most recent US$90.92M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.77x. For Metals and Mining companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is TGZ’s debt level acceptable?
With debt at 2.20% of equity, TGZ may be thought of as having low leverage. This range is considered safe as TGZ is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if TGZ’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 TGZ, the ratio of 32.44x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving TGZ ample headroom to grow its debt facilities.
Next Steps:
TGZ’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure TGZ has company-specific issues impacting its capital structure decisions. I suggest you continue to research Teranga Gold to get a better picture of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for TGZ’s future growth? Take a look at our free research report of analyst consensus for TGZ’s outlook.
2. Valuation: What is TGZ 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 TGZ 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.
