Yahoo Finance What does Trecora Resources’s (NYSE:TREC) Balance Sheet Tell Us About Its Future?
Trecora Resources (NYSE:TREC) is a small-cap stock with a market capitalization of US$265m. 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? So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into TREC here.
How much cash does TREC generate through its operations?
Over the past year, TREC has ramped up its debt from US$89m to US$105m , which is made up of current and long term debt. With this rise in debt, TREC’s cash and short-term investments stands at US$3m for investing into the business. Additionally, TREC has produced US$25m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 24%, meaning that TREC’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TREC’s case, it is able to generate 0.24x cash from its debt capital.
Can TREC pay its short-term liabilities?
At the current liabilities level of US$27m liabilities, the company has been able to meet these obligations given the level of current assets of US$54m, with a current ratio of 2.03x. Generally, for Chemicals companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can TREC service its debt comfortably?
With debt reaching 55% of equity, TREC 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. 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 TREC’s case, the ratio of 4.79x 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:
At its current level of cash flow coverage, TREC has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for TREC’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Trecora Resources to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for TREC’s future growth? Take a look at our free research report of analyst consensus for TREC’s outlook.
Valuation: What is TREC 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 TREC 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.
