Stocks with market capitalization between $2B and $10B, such as The Toro Company (NYSE:TTC) with a size of US$6.63b, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. TTC’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into TTC here.
How much cash does TTC generate through its operations?
Over the past year, TTC has reduced its debt from US$331.8m to US$312.5m , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at US$250.9m , ready to deploy into the business. Additionally, TTC has generated cash from operations of US$343.5m in the last twelve months, leading to an operating cash to total debt ratio of 110%, signalling that TTC’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 TTC’s case, it is able to generate 1.1x cash from its debt capital.
Can TTC pay its short-term liabilities?
Looking at TTC’s most recent US$511.7m liabilities, the company has been able to meet these commitments with a current assets level of US$873.0m, leading to a 1.71x current account ratio. Generally, for Machinery companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is TTC’s debt level acceptable?
TTC is a relatively highly levered company with a debt-to-equity of 48.1%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether TTC 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 TTC’s, case, the ratio of 21.38x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving TTC ample headroom to grow its debt facilities.
TTC’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. Since there is also no concerns around TTC’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how TTC has been performing in the past. I suggest you continue to research Toro to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TTC’s future growth? Take a look at our free research report of analyst consensus for TTC’s outlook.
- Valuation: What is TTC 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 TTC 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.
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 firstname.lastname@example.org.