Torslanda Property Investment AB (publ) (STO:TORSAB) is a small-cap stock with a market capitalization of kr287m. 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? Assessing first and foremost the financial health 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, potential investors would need to take a closer look, and I recommend you dig deeper yourself into TORSAB here.
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Does TORSAB Produce Much Cash Relative To Its Debt?
TORSAB has sustained its debt level by about kr269m over the last 12 months including long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at kr39m to keep the business going. On top of this, TORSAB has produced cash from operations of kr29m during the same period of time, resulting in an operating cash to total debt ratio of 11%, signalling that TORSAB’s debt is not covered by operating cash.
Can TORSAB meet its short-term obligations with the cash in hand?
At the current liabilities level of kr35m, it appears that the company has been able to meet these obligations given the level of current assets of kr44m, with a current ratio of 1.26x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Real Estate companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does TORSAB face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, TORSAB is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TORSAB's case, the ratio of 4.18x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving TORSAB ample headroom to grow its debt facilities.
TORSAB’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. I admit this is a fairly basic analysis for TORSAB's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Torslanda Property Investment to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TORSAB’s future growth? Take a look at our free research report of analyst consensus for TORSAB’s outlook.
- Valuation: What is TORSAB 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 TORSAB 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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.