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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Tabcorp Holdings Limited (ASX:TAH), with a market cap of AU$9.16B, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at TAH’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into TAH here. View our latest analysis for Tabcorp Holdings
How does TAH’s operating cash flow stack up against its debt?
TAH has built up its total debt levels in the last twelve months, from AU$1.16B to AU$1.71B , which comprises of short- and long-term debt. With this growth in debt, TAH currently has AU$114.30M remaining in cash and short-term investments , ready to deploy into the business. Moreover, TAH has produced AU$222.50M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 13.01%, meaning that TAH’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In TAH’s case, it is able to generate 0.13x cash from its debt capital.
Can TAH pay its short-term liabilities?
With current liabilities at AU$1.42B, the company is not able to meet these obligations given the level of current assets of AU$556.60M, with a current ratio of 0.39x below the prudent level of 3x.
Does TAH face the risk of succumbing to its debt-load?
With debt reaching 53.25% of equity, TAH may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since TAH is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
TAH’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I’m sure TAH has company-specific issues impacting its capital structure decisions. You should continue to research Tabcorp Holdings to get a more holistic view of the stock by looking at: