Note: this article has been revised.
Financial ratios are a mathematical means of comparing and deducing the overall health of a company internally. It helps highlight areas within the company that are doing well or areas within the company that are doing poorly. This often helps financial analysts, creditors, and even internal management determine the stability or instability of the business on a fundamental level. Using a mathematical approach to quantify the fundamentals of a business gives us a chance to look at the business from a non-biased position. The numbers themselves are telling us a story whether its good or bad.
The main categories for financial ratios are as follows: liquidity, solvency, efficiency, profitability, market prospect, investment leverage, and coverage.
The chart below is used to identify various fundamental calculations. More information on Terra Tech’s earnings ratios can be found here.
Liquidity ratios essentially analyze the entities ability to pay off its obligations or short term and long term liabilities. Liquidity ratios help the investor understand the companies cash levels and how fast it can turn assets into cash to pay off the companies obligations.
One means to assess the liquidity ratio is through cash equivalents, short term investments, or marketable securities, commonly coined the quick asset ratio. Analyst use quick asset ratios to determine the company’s current assets, which can often be liquidated within 90 days or near term.
Higher quick ratios show a companies quick assets are higher than its current liabilities. Conversely, when a company has a low quick ratio it shows that its current liabilities outweigh the companies quick assets; such as total current assets minus inventories – prepaid expenses.
Quick Ratio = 4,263,743 – 91,271 / 10,256,285 = .4068
Terra Tech has a quick ratio of .4068. This tells us that they are having a very difficult time creating enough cash to pay off or pay down their liabilities. If the quick ratio was 1 it would indicate that quick assets equal current assets. Which shows that the company could pay off its liabilities without selling its long term assets.
Lets take a little closer look into the companies ability to pay off its short term liabilities with Terra Techs current assets using the current ratio:
Current Ratio = 4,263,743 / 10,256,285 = 0.4157
Terra Tech only has the ability to pay off 41% of its current liabilities. The current ratio sheds light on the debt burden a company faces, in this case Terra Tech is greatly burdened and would have a hard time obtaining a creditor because its current assets are so small and will have a harder time making its debt payments with current assets. This shows that the company is highly leveraged.
Also important to note, the working capital ratio indicates the company does not have enough funds to run its day to day operations. Which is calculated by current assets / current liabilities.
Lets take a look at the times interest ratio which is known more commonly as the solvency ratio. This ratio measures the amount of income that can be used to pay its interest expenses in the future.
Times Interest Ratio (Solvency Ratio) = (-6,720,698) / 387,720 = -17.33 times.
Terra Tech has a negative 17.33 times interest ratio, this doesn’t bode well as far as the solvency ratio goes. In other words, the company must generate 17.33 times more income to pay its expenses in the future. The company is not capable of paying its fixed expenses and is in essence insolvent.
Terra Tech has a serious liquidity issue, if the company can’t correct these issues sooner than later, it could potentially face bankruptcy or as a “short term fix”, create a major stock dilution through selling of the companies equity–which is in fact what the company intends to do:
“This Prospectus relates to the offer and sale of up to 57,416,667 shares of common stock, par value $0.001 (the “Common Stock”), of Terra Tech Corp., a Nevada corporation, by Magna Equities II, LLC, a New York limited liability company (“Magna” or the “Selling Stockholder”) identified on page 25 of this Prospectus. We are registering a total of 57,416,667 shares of Common Stock (the “Total Commitment”), which have been issued or are issuable pursuant to an equity financing facility (the “Equity Line”) established by the terms of the Purchase Agreement described in this Prospectus”
Solvency ratios or leverage ratios helps the investor measure a company’s ability to sustain its operations going into the future. It measures its debt levels with its equity, assets, and earnings. What solvency ratios really tell the investor is if they can pay their bills in the long term.
Debt to Equity Ratio
The debt to equity ratio measures a company’s total debt to total equity. This is very important to investors because it shows where the companies financing comes from either creditors or investors. When the debt to equity ratio is higher it is more risky to the creditor and investor. Likewise, lower equity ratios are generally prefered as they show heavy internal investment by the company.
Debt to Equity Ratio = 10,256,285 / (352,603) = -29.08
Terra Techs debt to equity ratio is actually negative, indicating that the company is valued less than the original loan which is very risky to the creditor and the investor. This may also indicate that the investors may not want to finance the company because it is not performing well. The performance of the company may demonstrate why the company may be seeking out extra debt financing.
The equity ratio essentially measures the amount of assets that the investors have financed by comparing total equity to total assets. The equity ratio tells us two things. First, how much the total assets are owned by the investors or how much the investors own after all the liabilities have been paid off. Secondly, it tells us how leveraged the company is with its debt.
Equity Ratio = (352,603) / 9,903,682 = -0.0356
Higher equity ratios are more favorable because it tells potential investors that it is worth investing in. Lower equity ratios tells us the opposite that investors are more unwilling to invest into the company. The lower the ratio the more risky the investment for the creditor and investor alike. Creditors may be unwilling to lend to an institution with such a low equity ratio even more so when the equity ratio is negative
Debt ratio shows a companies ability to pay off its liabilities with its assets. It shows how many assets it would have to sell in order to pay off those liabilities. Companies with high levels of liabilities compared to their assets are considered highly leveraged and more risky. The lower the debt ratio the more stable the company is.
Debt Ratio = 10,256,285 / 9,903,682 = 1.0356
Terra Techs debt ratio is very high and implies that it may not be able to pay back its total liabilities long term. This doesn’t bode well for Terra Tech as it is highly leveraged and is very risky to the investor.
Mounting debt and some very serious solvency issues tear at the very fabric of the businesses foundations. However, while Terra Tech faces some major obstacles within its current business model, there are some good things coming from its subsidiaries in Nevada. Obtaining 4 Dispensary licenses, 2 Cultivation licenses and 2 Production licenses in the State. Terra Tech has also secured the proper equity line through Magna Equities II with a 24 month life line sale of 57,416,667 shares of common stock, but the finer details of the agreement are a little hairy for the company and its investors. Investors should be made aware that more dilution is a high and probable likelihood.
Always conduct your own due diligence when investing in the stock market and try to identify technical and fundamental analysis in your investment strategies.