Stocks with market capitalization between $2B and $10B, such as Terex Corporation (NYSE:TEX) with a size of USD $3.81B, do not attract as much attention from the investing community as do the small-caps and large-caps. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Mid-caps are found to be more volatile than the large-caps but safer than small-caps, largely due to their weaker balance sheet. I recommend you look at the following hurdles to assess TEX’s financial health. See our latest analysis for TEX
Does TEX face the risk of succumbing to its debt-load?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. For TEX, the debt-to-equity ratio is 71.35%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet. While debt-to-equity ratio has several factors at play, an easier way to check whether TEX’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. TEX’s interest on debt is not strongly covered by earnings as it sits at around 2.19x. Lenders may be more reluctant to lend out more funding as TEX’s low interest coverage already puts the company at higher risk of default.
Can TEX meet its short-term obligations with the cash in hand?
Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. We need to assess TEX’s cash and other liquid assets against its upcoming expenses. Our analysis shows that TEX does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, investors should ask themselves if they believe TEX can sustainably improve cash flows to better cushion for events which may require debt repayment. Since TEX’s financial situation may change over time, I recommend examining market expectations for TEX’s future growth on our free analysis platform.
Are you a potential investor? Although investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. Ultimately, debt financing is an important source of funding for companies seeking to grow through new projects and investments. TEX’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
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.