Investors are always looking for growth in small-cap stocks like Trevali Mining Corporation (TSE:TV), with a market cap of CA$623.4m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into TV here.
Does TV produce enough cash relative to debt?
Over the past year, TV has ramped up its debt from US$89.1m to US$143.2m , which is made up of current and long term debt. With this increase in debt, TV’s cash and short-term investments stands at US$102.4m for investing into the business. Moreover, TV has produced cash from operations of US$176.6m in the last twelve months, resulting in an operating cash to total debt ratio of 123%, meaning that TV’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TV’s case, it is able to generate 1.23x cash from its debt capital.
Can TV pay its short-term liabilities?
Looking at TV’s most recent US$89.0m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.8x. 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.
Can TV service its debt comfortably?
TV’s level of debt is appropriate relative to its total equity, at 18.5%. This range is considered safe as TV is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether TV 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 TV’s, case, the ratio of 6.66x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as TV’s high interest coverage is seen as responsible and safe practice.
Next Steps:
TV has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure TV has company-specific issues impacting its capital structure decisions. You should continue to research Trevali Mining to get a more holistic view of the stock by looking at: