Investors are always looking for growth in small-cap stocks like Trio-Tech International (NYSEMKT:TRT), with a market cap of US$9.7m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Semiconductor industry, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into TRT here.
How much cash does TRT generate through its operations?
TRT’s debt levels surged from US$4.3m to US$6.0m over the last 12 months , which accounts for long term debt. With this growth in debt, TRT currently has US$8.1m remaining in cash and short-term investments , ready to deploy into the business. On top of this, TRT has produced US$5.1m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 86%, meaning that TRT’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TRT’s case, it is able to generate 0.86x cash from its debt capital.
Can TRT meet its short-term obligations with the cash in hand?
With current liabilities at US$9.6m, the company has been able to meet these commitments with a current assets level of US$20m, leading to a 2.11x current account ratio. For Semiconductor companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does TRT face the risk of succumbing to its debt-load?
With debt at 26% of equity, TRT may be thought of as appropriately levered. TRT is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether TRT 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 TRT’s, case, the ratio of 8.34x 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.
TRT’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure TRT has company-specific issues impacting its capital structure decisions. I recommend you continue to research Trio-Tech International to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TRT’s future growth? Take a look at our free research report of analyst consensus for TRT’s outlook.
- Valuation: What is TRT 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 TRT 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 firstname.lastname@example.org.