Yahoo Finance Are Tricorn Group plc’s (LON:TCN) Interest Costs Too High?
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While small-cap stocks, such as Tricorn Group plc (LON:TCN) with its market cap of UK£6.3m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into TCN here.
Does TCN produce enough cash relative to debt?
Over the past year, TCN has reduced its debt from UK£4.4m to UK£3.9m made up of predominantly near term debt. With this debt payback, TCN currently has UK£643k remaining in cash and short-term investments for investing into the business. On top of this, TCN has generated UK£1.3m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 34%, indicating that TCN’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TCN’s case, it is able to generate 0.34x cash from its debt capital.
Can TCN meet its short-term obligations with the cash in hand?
Looking at TCN’s UK£7.9m 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 1.1x. For Machinery companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does TCN face the risk of succumbing to its debt-load?
TCN is a relatively highly levered company with a debt-to-equity of 58%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some 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 after interest and tax at least three times its net interest payments is considered financially sound. In TCN’s case, the ratio of 3.59x 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.
Next Steps:
TCN’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. This is only a rough assessment of financial health, and I’m sure TCN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Tricorn Group to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for TCN’s future growth? Take a look at our free research report of analyst consensus for TCN’s outlook.
Valuation: What is TCN 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 TCN 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
