Are Troax Group AB (publ)'s (STO:TROAX) Interest Costs Too High?
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While small-cap stocks, such as Troax Group AB (publ) (STO:TROAX) with its market cap of kr6.0b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into TROAX here.
TROAX’s Debt (And Cash Flows)
Over the past year, TROAX has ramped up its debt from €77m to €84m , which accounts for long term debt. With this increase in debt, TROAX's cash and short-term investments stands at €25m , ready to be used for running the business. Additionally, TROAX has produced cash from operations of €25m over the same time period, resulting in an operating cash to total debt ratio of 29%, signalling that TROAX’s debt is appropriately covered by operating cash.
Does TROAX’s liquid assets cover its short-term commitments?
Looking at TROAX’s €27m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.64x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does TROAX face the risk of succumbing to its debt-load?
TROAX is a relatively highly levered company with a debt-to-equity of 98%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if TROAX’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 TROAX, the ratio of 41.05x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving TROAX ample headroom to grow its debt facilities.
Next Steps:
TROAX’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. Since there is also no concerns around TROAX'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 TROAX has company-specific issues impacting its capital structure decisions. I recommend you continue to research Troax Group to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for TROAX’s future growth? Take a look at our free research report of analyst consensus for TROAX’s outlook.
Valuation: What is TROAX 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 TROAX 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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
