Tom Tailor Holding SE (ETR:TTI) is a small-cap stock with a market capitalization of €157.3m. 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? Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into TTI here.
Does TTI produce enough cash relative to debt?
Over the past year, TTI has reduced its debt from €169.4m to €160.7m , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at €24.0m , ready to deploy into the business. Moreover, TTI has generated cash from operations of €54.8m over the same time period, resulting in an operating cash to total debt ratio of 34.1%, indicating that TTI’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 TTI’s case, it is able to generate 0.34x cash from its debt capital.
Can TTI pay its short-term liabilities?
At the current liabilities level of €213.0m liabilities, the company has been able to meet these obligations given the level of current assets of €246.1m, with a current ratio of 1.16x. For Specialty Retail 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 TTI’s debt level acceptable?
With a debt-to-equity ratio of 71.7%, TTI can be considered as an above-average leveraged company. 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 TTI’s case, the ratio of 3.48x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving TTI ample headroom to grow its debt facilities.
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Although TTI’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for TTI’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Tom Tailor Holding to get a better picture of the small-cap by looking at: