While small-cap stocks, such as TPI Composites, Inc. (NASDAQ:TPIC) with its market cap of US$1.0b, 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 vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into TPIC here.
How much cash does TPIC generate through its operations?
TPIC has sustained its debt level by about US$133m over the last 12 months including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$111m , ready to deploy into the business. Additionally, TPIC has generated cash from operations of US$56m in the last twelve months, leading to an operating cash to total debt ratio of 42%, indicating that TPIC’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 TPIC’s case, it is able to generate 0.42x cash from its debt capital.
Can TPIC meet its short-term obligations with the cash in hand?
Looking at TPIC’s US$248m in current liabilities, the company has been able to meet these commitments with a current assets level of US$385m, leading to a 1.55x current account ratio. Usually, for Electrical companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is TPIC’s debt level acceptable?
TPIC is a relatively highly levered company with a debt-to-equity of 58%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether TPIC 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 TPIC’s, case, the ratio of 4.29x suggests that interest is appropriately 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.
TPIC’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 TPIC’s financial health. Other important fundamentals need to be considered alongside. You should continue to research TPI Composites to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TPIC’s future growth? Take a look at our free research report of analyst consensus for TPIC’s outlook.
- Valuation: What is TPIC 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 TPIC 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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