TimkenSteel Corporation (NYSE:TMST) is a small-cap stock with a market capitalization of US$565m. 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? Since TMST is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. 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 TMST here.
Does TMST produce enough cash relative to debt?
TMST has built up its total debt levels in the last twelve months, from US$165m to US$189m , which includes long-term debt. With this increase in debt, TMST currently has US$22m remaining in cash and short-term investments for investing into the business. Moreover, TMST has produced US$19m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 9.8%, signalling that TMST’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In TMST’s case, it is able to generate 0.098x cash from its debt capital.
Does TMST’s liquid assets cover its short-term commitments?
Looking at TMST’s US$221m 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 2.23x. For Metals and Mining 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.
Is TMST’s debt level acceptable?
TMST’s level of debt is appropriate relative to its total equity, at 35%. TMST is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with TMST, and the company has plenty of headroom and ability to raise debt should it need to in the future.
TMST’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for TMST’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research TimkenSteel to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TMST’s future growth? Take a look at our free research report of analyst consensus for TMST’s outlook.
- Valuation: What is TMST 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 TMST 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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