Tredegar Corporation (NYSE:TG) is a small-cap stock with a market capitalization of US$619m. 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? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into TG here.
How much cash does TG generate through its operations?
TG’s debt levels have fallen from US$187m to US$123m over the last 12 months – this includes both the current and long-term debt. With this debt payback, TG currently has US$62m remaining in cash and short-term investments for investing into the business. Additionally, TG has produced US$138m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 112%, indicating that TG’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 TG’s case, it is able to generate 1.12x cash from its debt capital.
Can TG pay its short-term liabilities?
At the current liabilities level of US$161m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.8x. For Chemicals companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can TG service its debt comfortably?
With a debt-to-equity ratio of 33%, TG’s debt level may be seen as prudent. TG is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if TG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For TG, the ratio of 10.02x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as TG’s high interest coverage is seen as responsible and safe practice.
TG’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how TG has been performing in the past. I recommend you continue to research Tredegar to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TG’s future growth? Take a look at our free research report of analyst consensus for TG’s outlook.
- Valuation: What is TG 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 TG 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 email@example.com.