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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Ternium S.A. (NYSE:TX), with a market cap of US$5.3b, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at TX’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into TX here.
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How much cash does TX generate through its operations?
Over the past year, TX has reduced its debt from US$3.3b to US$2.6b , which also accounts for long term debt. With this reduction in debt, TX’s cash and short-term investments stands at US$460m for investing into the business. Additionally, TX has produced US$1.2b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 47%, indicating that TX’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TX’s case, it is able to generate 0.47x cash from its debt capital.
Can TX pay its short-term liabilities?
Looking at TX’s US$2.3b in current liabilities, the company has been able to meet these obligations given the level of current assets of US$4.7b, with a current ratio of 2.01x. For Metals and Mining companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can TX service its debt comfortably?
With debt at 38% of equity, TX may be thought of as appropriately levered. TX is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether TX 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 TX’s, case, the ratio of 17.97x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving TX ample headroom to grow its debt facilities.
Next Steps:
TX’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure TX has company-specific issues impacting its capital structure decisions. I suggest you continue to research Ternium to get a more holistic view of the stock by looking at: