Can Tigers Realm Coal Limited’s (ASX:TIG) Debt Pose A Serious Problem For The Company?
Jodi Pearce March 5, 2017
Investors are always looking for growth in small-cap stocks like Tigers Realm Coal Limited (
ASX:TIG) with its market cap of USD $71 Million. However, an important fact which most ignore is: how financially healthy is the company? Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt.
Apart from a major industry-downturn like in the energy sector, it can be anything from natural calamity; political unrest; economic collapse; labor-strike; supply-chain disruption; or even a major factory breakdown, which may test a company’s financial resilience. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge.
See our latest analysis for TIG
Does TIG generate enough cash through operations to meet all its needs?
At the end of the day, a company must pay bills and salaries, and must be able to invest in lucrative projects through cash. Firms have a certain amount of control over revenue recognition, which makes an analysis of its operating cash flow even more important . In the case of Tigers Realm Coal, operating cash flow turned out to be -300% of its overall debt over the past twelve months. This indicates that currently Tigers Realm Coal’s expenses exceed revenues. While that can be acceptable for a fast-growing company scaling its business, for a more mature company, these are signs of trouble ahead.
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Tigers Realm Coal (ASX:TIG) Historical Debt Mar 5th 17
Can TIG pay its short-term debts?
There are many problems that come unannounced. For instance, a hurricane or even labor strikes. In 2011, a Tsunami and earthquake in Japan had wiped out a significant chunk of auto supply chain in the country. If these were not Japan’s biggest automakers and electronics-maker with big cash reserves and funding sources, it’s hard to imagine how would they have recovered . But that does not absolve the company from its obligations such as lease payments, interest payments, and salaries. In addition, failure to service debt and bank loans can seriously hurts its reputation, making funding extremely expensive in the future, if at all it survives. Tigers Realm Coal is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
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Tigers Realm Coal (ASX:TIG) Net Worth Mar 5th 17
Does Tigers Realm Coal face the risk of succumbing to its debt-load?
While ideally I reckon the debt-to equity ratio of a financially healthy company to be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For Tigers Realm Coal, the debt to equity ratio is 50.5% and this indicates that Tigers Realm Coal’s debt can cause trouble for the company in a downturn but still it’s at a manageable level . While debt-to-equity ratio has several factors at play, an easier way to check whether it’s at a sustainable level is to check its ability to service the debt. A company generating earnings at least 5x of its interest payments is considered financially sound. In addition, with such a coverage ratio, the earnings remain more stable. In TIG’s case the company is making a loss, therefore interest on debt is not well covered by earnings.
Conclusion
With a high level of debt on its balance sheet, Tigers Realm Coal could still be in a financially strong position if it’s operating cash flows and earnings stack up. In this case, Tigers Realm Coal’s cash flows and earnings tell a different story. It needs to do a lot of work on its profitability and operational efficiency to be designated as a financially sound company.
Now when you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you
check out our latest free analysis report on Tigers Realm Coal to see what are TIG’s growth prospects and whether it could be considered an undervalued opportunity.
PS. If you are not interested in Tigers Realm Coal anymore, you can use our free platform to see my list of over
150 other stocks with a high growth potential.
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