While small-cap stocks, such as Titan Machinery Inc. (NASDAQ:TITN) with its market cap of US$369m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into TITN here.
TITN’s Debt (And Cash Flows)
TITN has sustained its debt level by about US$348m over the last 12 months – this includes long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$57m , ready to be used for running the business. Moreover, TITN has generated cash from operations of US$47m during the same period of time, leading to an operating cash to total debt ratio of 13%, signalling that TITN’s debt is not covered by operating cash.
Does TITN’s liquid assets cover its short-term commitments?
Looking at TITN’s US$420m in current liabilities, the company has been able to meet these commitments with a current assets level of US$641m, leading to a 1.52x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Trade Distributors companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is TITN’s debt level acceptable?
TITN is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether TITN 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 TITN's, case, the ratio of 2.23x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although TITN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around TITN's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for TITN's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Titan Machinery to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TITN’s future growth? Take a look at our free research report of analyst consensus for TITN’s outlook.
- Valuation: What is TITN 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 TITN 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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