Telit Communications PLC (LON:TCM) is a small-cap stock with a market capitalization of UK£208.3m. 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 Communications industry, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into TCM here.

How does TCM’s operating cash flow stack up against its debt?

Over the past year, TCM has ramped up its debt from US$44.3m to US$72.5m , which comprises of short- and long-term debt. With this rise in debt, TCM’s cash and short-term investments stands at US$41.9m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of TCM’s operating efficiency ratios such as ROA here.

Can TCM pay its short-term liabilities?

Looking at TCM’s most recent US$165.4m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$183.4m, with a current ratio of 1.11x. Generally, for Communications companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can TCM service its debt comfortably?

With debt reaching 58.2% of equity, TCM may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since TCM is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

At its current level of cash flow coverage, TCM has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure TCM has company-specific issues impacting its capital structure decisions. I suggest you continue to research Telit Communications to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for TCM’s future growth? Take a look at our free research report of analyst consensus for TCM’s outlook.

2. Valuation: What is TCM 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 TCM is currently mispriced by the market.

3. 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.