Troy Resources Limited (ASX:TRY) is a small-cap stock with a market capitalization of AU$53m. 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? Given that TRY is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I recommend you dig deeper yourself into TRY here.
Does TRY produce enough cash relative to debt?
Over the past year, TRY has reduced its debt from AU$33m to AU$14m . With this debt payback, the current cash and short-term investment levels stands at AU$1.5m , ready to deploy into the business. Additionally, TRY has produced cash from operations of AU$17m in the last twelve months, leading to an operating cash to total debt ratio of 119%, indicating that TRY’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In TRY’s case, it is able to generate 1.19x cash from its debt capital.
Can TRY meet its short-term obligations with the cash in hand?
Looking at TRY’s AU$45m in current liabilities, the company may not have an easy time meeting these commitments with a current assets level of AU$21m, leading to a current ratio of 0.46x.
Does TRY face the risk of succumbing to its debt-load?
TRY’s level of debt is appropriate relative to its total equity, at 24%. TRY is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. TRY’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
TRY’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. Though 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 TRY has been performing in the past. I suggest you continue to research Troy Resources to get a better picture of the stock by looking at:
- Valuation: What is TRY 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 TRY is currently mispriced by the market.
- Historical Performance: What has TRY’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.
- 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.