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While small-cap stocks, such as Tourism Holdings Limited (NZSE:THL) with its market cap of NZ$613m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into THL here.
Does THL produce enough cash relative to debt?
THL has built up its total debt levels in the last twelve months, from NZ$186m to NZ$215m , which accounts for long term debt. With this rise in debt, THL’s cash and short-term investments stands at NZ$14m for investing into the business. Moreover, THL has generated cash from operations of NZ$25m during the same period of time, leading to an operating cash to total debt ratio of 11%, signalling that THL’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In THL’s case, it is able to generate 0.11x cash from its debt capital.
Can THL meet its short-term obligations with the cash in hand?
Looking at THL’s NZ$90m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.01x. For Transportation companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does THL face the risk of succumbing to its debt-load?
With debt reaching 86% of equity, THL 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 test if THL’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 THL, the ratio of 6.73x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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THL’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how THL has been performing in the past. You should continue to research Tourism Holdings to get a better picture of the small-cap by looking at: