Yahoo Finance What You Must Know About TalkTalk Telecom Group PLC’s (LON:TALK) Financial Strength
While small-cap stocks, such as TalkTalk Telecom Group PLC (LSE:TALK) with its market cap of UK£1.23B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Telecom industry facing headwinds from current disruption, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into TALK here.
Does TALK generate an acceptable amount of cash through operations?
Over the past year, TALK has reduced its debt from UK£871.00M to UK£798.00M – this includes both the current and long-term debt. With this debt payback, TALK currently has UK£43.00M remaining in cash and short-term investments , ready to deploy into the business. Moreover, TALK has generated cash from operations of UK£118.00M in the last twelve months, resulting in an operating cash to total debt ratio of 14.79%, meaning that TALK’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In TALK’s case, it is able to generate 0.15x cash from its debt capital.
Can TALK pay its short-term liabilities?
Looking at TALK’s most recent UK£579.00M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of UK£447.00M, leading to a 0.77x current account ratio. which is under the appropriate industry ratio of 3x.
Does TALK face the risk of succumbing to its debt-load?
With total debt exceeding equities, TALK is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since TALK is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
TALK’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 TALK has company-specific issues impacting its capital structure decisions. You should continue to research TalkTalk Telecom Group to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for TALK’s future growth? Take a look at our free research report of analyst consensus for TALK’s outlook.
Valuation: What is TALK 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 TALK 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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
