Investors are always looking for growth in small-cap stocks like Tucows Inc (NASDAQ:TCX), with a market cap of US$551m. However, an important fact which most ignore is: how financially healthy is the business? IT companies, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. 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 suggest you dig deeper yourself into TCX here.
Does TCX produce enough cash relative to debt?
Over the past year, TCX has reduced its debt from US$86m to US$69m , which is made up of current and long term debt. With this debt payback, TCX’s cash and short-term investments stands at US$11m for investing into the business. Moreover, TCX has generated cash from operations of US$37m over the same time period, resulting in an operating cash to total debt ratio of 53%, meaning that TCX’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 TCX’s case, it is able to generate 0.53x cash from its debt capital.
Can TCX meet its short-term obligations with the cash in hand?
Looking at TCX’s most recent US$171m liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$140m, with a current ratio of 0.82x.
Can TCX service its debt comfortably?
With debt reaching 99% of equity, TCX may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if TCX’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 TCX, the ratio of 8.05x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as TCX’s high interest coverage is seen as responsible and safe practice.
TCX’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. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure TCX has company-specific issues impacting its capital structure decisions. I recommend you continue to research Tucows to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TCX’s future growth? Take a look at our free research report of analyst consensus for TCX’s outlook.
- Valuation: What is TCX 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 TCX 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.