Is TT Electronics plc’s (LON:TTG) Balance Sheet Strong Enough To Weather A Storm?
TT Electronics plc (LSE:TTG) is a small-cap stock with a market capitalization of £348.70M. 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? Electronic companies, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into TTG here.
Does TTG generate enough cash through operations?
TTG has built up its total debt levels in the last twelve months, from £97.0M to £105.2M , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at £49.8M for investing into the business. On top of this, TTG has generated cash from operations of £26.6M over the same time period, leading to an operating cash to total debt ratio of 25.29%, signalling that TTG’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TTG’s case, it is able to generate 0.25x cash from its debt capital.
Can TTG meet its short-term obligations with the cash in hand?
Looking at TTG’s most recent £116.0M liabilities, the company has been able to meet these obligations given the level of current assets of £227.6M, with a current ratio of 1.96x. For electronic companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can TTG service its debt comfortably?
TTG is a relatively highly levered company with a debt-to-equity of 48.35%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether TTG 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 TTG’s, case, the ratio of 12.04x suggests that interest is excessively 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.
Next Steps:
Are you a shareholder? TTG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, TTG’s financial situation may change. I suggest keeping on top of market expectations for TTG’s future growth on our free analysis platform.
Are you a potential investor? Investors shouldn’t be put off by TTG’s high debt levels based on this simple analysis. High level of cash generated from operating activities indicates its debt funding is being effectively used. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. In order to build your conviction in the stock, you need to also examine TTG’s track record. As a following step, you should take a look at TTG’s past performance analysis on our free platform to figure out TTG’s financial health position.
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.
