Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Trinity Industries Inc (NYSE:TRN), with a market cap of US$4.2b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at TRN’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into TRN here.
How much cash does TRN generate through its operations?
TRN has sustained its debt level by about US$3.3b over the last 12 months made up of current and long term debt. At this current level of debt, TRN’s cash and short-term investments stands at US$430m , ready to deploy into the business. Additionally, TRN has produced US$593m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 18%, meaning that TRN’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TRN’s case, it is able to generate 0.18x cash from its debt capital.
Can TRN pay its short-term liabilities?
With current liabilities at US$632m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.72x. Usually, for Machinery companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is TRN’s debt level acceptable?
With a debt-to-equity ratio of 71%, TRN can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if TRN’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 TRN, the ratio of 2.37x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as TRN’s low interest coverage already puts the company at higher risk of default.
TRN’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure TRN has company-specific issues impacting its capital structure decisions. You should continue to research Trinity Industries to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TRN’s future growth? Take a look at our free research report of analyst consensus for TRN’s outlook.
- Valuation: What is TRN 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 TRN 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.