We've downgraded Terra Industries (TRA), which engages in the production and marketing of nitrogen and methanol products for agricultural and industrial markets worldwide. The primary factors that have impacted our rating are mixed. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and notable return on equity. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow, a generally disappointing performance in the stock itself and poor profit margins.
Terra's revenue growth has slightly outpaced the industry average of 30.8%. Since the same quarter one year prior, revenues rose by 36.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
The current debt-to-equity ratio, 0.35, is low and is below the industry average, implying that there has been successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.40, which illustrates the ability to avoid short-term cash problems.
Terra's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 68.94%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.Net operating cash flow has significantly decreased to $94.50 million or 52.48% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
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