Tourism Holdings Limited Case Study

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Tourism Holdings Limited

THL

$5.990

$0.010 / 0.17%52 Week Change: $2.010 / 50.42%
Grant WebsterChief Executive Officer
Jo AllisonChief Operating Officer
Rob CampbellIndependent Chairman
Cathy QuinnIndependent Director
Graeme WongIndependent Director
Debra BirchNon-Executive Director
Kay HoweNon-Executive Director
Grainne TrouteNon-Executive Director
Mark DavisCFO / Company Secretary

Company summary

First Listed
DomicileNZ
SolicitorMinter Ellison Rudd Watts, Auckland
AuditorPricewaterhouseCoopers, Auckland
Share RegistryLink Market Services Limited
End of Financial YearJune
© Copyright 2017 NZX Limited, Market data delayed by 20 minutes
  • S&P/NZX50 8,390 0.36%
  • S&P/NZX20 5,630 0.30%
  • S&P/NZX10 8,129 0.29%

Investors are always looking for growth in small-cap stocks like Tourism Holdings Limited (NZSE:THL) with its market cap of USD $306 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.

When a company is faced with an extreme event undercutting its profits or disrupting its operations temporarily, it’s the company’s ability to meet short-term obligations which allows it to remain in the business. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. See our latest analysis for THL

Does Tourism Holdings generate an acceptable amount of cash through operations?

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. Over the past year, Tourism Holdings’s operating cash flows stood at 18.4% of its overall debt. This means while Tourism Holdings can cover its operating expenses, I would be cautious about its ability to service the debt should tougher times come.

Can THL 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. For a small company, that could be a death blow if it doesn’t have enough reserves to meet its short-term obligations – payments to suppliers, wages, short-term bank loans, interest on long-term debt. Tourism Holdings is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.

Does Tourism Holdings 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 Tourism Holdings, the debt to equity ratio is 65.1% and this indicates that Tourism Holdings’s debt can cause trouble for the company in a downturn but still it’s at a manageable level. No matter how high is the debt, if a company can easily cover the interest payments, it’s considered to be making a good use of that excessive leverage. To keep an eye on how it’s doing on that front, an investor can check how easily the company can service its debt. If it earns at least 5x or more of its interest payments, that’s an indication of financial strength. In THL’s case the interest on debt is well covered by earnings (5.3x coverage).

Final words

Tourism Holdings fails to impress in terms of its debt to equity ratio and operating cash flows compared to its overall-debt. However, the company does well on the earnings to interest-costs ratio. It appears THL needs to reduce it’s debt-load and increase the operational efficiency to be categorized as a financially healthy 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 Tourism Holdings to see what are THL’s growth prospects and whether it could be considered an undervalued opportunity.

PS. If you are not interested in Tourism Holdings 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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