Investors are always looking for growth in small-cap stocks like Think Childcare Limited (ASX:TNK), with a market cap of AU$90.61M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into TNK here.
Does TNK generate enough cash through operations?
Over the past year, TNK has ramped up its debt from AU$10.34M to AU$23.24M , which is made up of current and long term debt. With this growth in debt, TNK’s cash and short-term investments stands at AU$451.00K , ready to deploy into the business. Additionally, TNK has generated cash from operations of AU$5.38M over the same time period, resulting in an operating cash to total debt ratio of 23.17%, meaning that TNK’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TNK’s case, it is able to generate 0.23x cash from its debt capital.
Does TNK’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$9.39M liabilities, it seems that the business is not able to meet these obligations given the level of current assets of AU$5.55M, with a current ratio of 0.59x below the prudent level of 3x.
Can TNK service its debt comfortably?
With debt reaching 91.51% of equity, TNK 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 check to see whether TNK 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 TNK’s, case, the ratio of 11.29x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as TNK’s high interest coverage is seen as responsible and safe practice.
Next Steps:
TNK’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. 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 Think Childcare to get a better picture of the stock by looking at: