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Investors are always looking for growth in small-cap stocks like Teekay Tankers Ltd. (NYSE:TNK), with a market cap of US$298m. However, an important fact which most ignore is: how financially healthy is the business? Given that TNK is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into TNK here.
Does TNK Produce Much Cash Relative To Its Debt?
TNK has sustained its debt level by about US$1.1b over the last 12 months including long-term debt. At this constant level of debt, TNK currently has US$78m remaining in cash and short-term investments , ready to be used for running the business. Additionally, TNK has produced cash from operations of US$44m over the same time period, leading to an operating cash to total debt ratio of 4.0%, indicating that TNK’s operating cash is less than its debt.
Does TNK’s liquid assets cover its short-term commitments?
With current liabilities at US$257m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.03x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Oil and Gas companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can TNK service its debt comfortably?
With total debt exceeding equity, TNK is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since TNK is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although TNK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around TNK's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure TNK has company-specific issues impacting its capital structure decisions. You should continue to research Teekay Tankers to get a better picture of the small-cap by looking at: