Yahoo Movies Trinseo SA (NYSE:TSE): Time For A Financial Health Check
While small-cap stocks, such as Trinseo SA (NYSE:TSE) with its market cap of US$2.0b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into TSE here.
Does TSE produce enough cash relative to debt?
TSE has sustained its debt level by about US$1.2b over the last 12 months which accounts for long term debt. At this current level of debt, the current cash and short-term investment levels stands at US$423m , ready to deploy into the business. On top of this, TSE has generated cash from operations of US$435m over the same time period, resulting in an operating cash to total debt ratio of 37%, signalling that TSE’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TSE’s case, it is able to generate 0.37x cash from its debt capital.
Can TSE pay its short-term liabilities?
Looking at TSE’s US$628m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$1.8b, with a current ratio of 2.86x. Generally, for Chemicals companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does TSE face the risk of succumbing to its debt-load?
With total debt exceeding equities, TSE is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether TSE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TSE’s, case, the ratio of 8.13x 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:
TSE’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 TSE has company-specific issues impacting its capital structure decisions. I recommend you continue to research Trinseo to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for TSE’s future growth? Take a look at our free research report of analyst consensus for TSE’s outlook.
Valuation: What is TSE 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 TSE 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.
