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Port of Tauranga Limited (NZSE:POT) is a small-cap stock with a market capitalization of NZ$4.1b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? 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. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into POT here.
POT’s Debt (And Cash Flows)
Over the past year, POT has ramped up its debt from NZ$431m to NZ$469m , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at NZ$3.2m , ready to be used for running the business. On top of this, POT has produced NZ$101m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 21%, meaning that POT’s current level of operating cash is high enough to cover debt.
Can POT meet its short-term obligations with the cash in hand?
Looking at POT’s NZ$321m in current liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of NZ$62m, leading to a current ratio of 0.19x. The current ratio is the number you get when you divide current assets by current liabilities.
Is POT’s debt level acceptable?
POT is a relatively highly levered company with a debt-to-equity of 43%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In POT's case, the ratio of 7.63x 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.
POT’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven't considered other factors such as how POT has been performing in the past. You should continue to research Port of Tauranga to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for POT’s future growth? Take a look at our free research report of analyst consensus for POT’s outlook.
- Valuation: What is POT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether POT is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.