Yahoo Movies Is Tilly’s Inc (NYSE:TLYS) A Financially Sound Company?
Tilly’s Inc (NYSE:TLYS), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is TLYS will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean TLYS has outstanding financial strength. I recommend you look at the following hurdles to assess TLYS’s financial health.
Check out our latest analysis for Tilly’s
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. Either TLYS does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. A single-digit revenue growth of 4.6% for TLYS is considerably low for a small-cap company. More capital can help the business grow faster. If TLYS is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does TLYS’s liquid assets cover its short-term commitments?
Since Tilly’s doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of US$92.8m 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 2.36x. For Specialty Retail companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Next Steps:
TLYS is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may be different. This is only a rough assessment of financial health, and I’m sure TLYS has company-specific issues impacting its capital structure decisions. I recommend you continue to research Tilly’s to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for TLYS’s future growth? Take a look at our free research report of analyst consensus for TLYS’s outlook.
Valuation: What is TLYS 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 TLYS 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.
