While small-cap stocks, such as Trans World Entertainment Corporation (NASDAQ:TWMC) with its market cap of US$47.07M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Specialty Retail businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into TWMC here.
How does TWMC’s operating cash flow stack up against its debt?
Over the past year, TWMC has borrowed debt capital of around US$5.00M made up of predominantly near term debt. With this ramp up in debt, TWMC’s cash and short-term investments stands at US$3.92M , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of TWMC’s operating efficiency ratios such as ROA here.
Does TWMC’s liquid assets cover its short-term commitments?
Looking at TWMC’s most recent US$0 liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0x, which is below the prudent industry ratio of 3x.
Does TWMC face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 2.63%, TWMC’s debt level is relatively low. TWMC is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is extremely low for TWMC, and the company also has the ability and headroom to increase debt if needed going forward.
Although TWMC’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. Furthermore, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how TWMC has been performing in the past. I suggest you continue to research Trans World Entertainment to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has TWMC’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 2. 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 pass 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.