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Investors are always looking for growth in small-cap stocks like Thor Industries, Inc. (NYSE:THO), with a market cap of US$3.2b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into THO here.
THO’s Debt (And Cash Flows)
THO's debt levels surged from US$80m to US$2.4b over the last 12 months , which includes long-term debt. With this rise in debt, THO's cash and short-term investments stands at US$461m to keep the business going. On top of this, THO has generated cash from operations of US$445m in the last twelve months, leading to an operating cash to total debt ratio of 18%, meaning that THO’s operating cash is less than its debt.
Can THO pay its short-term liabilities?
With current liabilities at US$1.5b, the company has been able to meet these commitments with a current assets level of US$2.3b, leading to a 1.54x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Auto companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can THO service its debt comfortably?
Since total debt levels exceed equity, THO is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if THO’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 THO, the ratio of 12.89x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as THO’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although THO’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 THO'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 THO has company-specific issues impacting its capital structure decisions. I recommend you continue to research Thor Industries to get a more holistic view of the small-cap by looking at: