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Is TESSCO Technologies Incorporated’s (NASDAQ:TESS) Balance Sheet Strong Enough To Weather A Storm?

While small-cap stocks, such as TESSCO Technologies Incorporated (NASDAQ:TESS) with its market cap of US$123m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Communications industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into TESS here.

How much cash does TESS generate through its operations?

TESS’s debt levels surged from US$8m to US$16m over the last 12 months , which is made up of current and long term debt. With this increase in debt, TESS currently has below $10K remaining in cash and short-term investment, which is rather low. However, TESS has produced cash from operations of US$3m over the same time period, resulting in an operating cash to total debt ratio of 20%, meaning that the current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TESS’s case, it is able to generate 0.2x cash from its debt capital.

Does TESS’s liquid assets cover its short-term commitments?

With current liabilities at US$110m, it seems that the business has been able to meet these obligations given the level of current assets of US$185m, with a current ratio of 1.67x. For Communications companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

NasdaqGS:TESS Historical Debt October 8th 18

Does TESS face the risk of succumbing to its debt-load?

TESS’s level of debt is appropriate relative to its total equity, at 15%. TESS is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether TESS 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 TESS’s, case, the ratio of 15.62x 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.

Next Steps:

TESS’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how TESS has been performing in the past. I suggest you continue to research TESSCO Technologies to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for TESS’s future growth? Take a look at our free research report of analyst consensus for TESS’s outlook.
  2. Valuation: What is TESS 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 TESS 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 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.