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While small-cap stocks, such as Rakon Limited (NZSE:RAK) with its market cap of NZ$45.39M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Electronic industry, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into RAK here.
How does RAK’s operating cash flow stack up against its debt?
RAK has shrunken its total debt levels in the last twelve months, from NZ$16.28M to NZ$7.94M , which is mainly comprised of near term debt. With this reduction in debt, RAK’s cash and short-term investments stands at NZ$3.31M for investing into the business. On top of this, RAK has generated cash from operations of NZ$9.50M during the same period of time, resulting in an operating cash to total debt ratio of 119.76%, indicating that RAK’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In RAK’s case, it is able to generate 1.2x cash from its debt capital.
Can RAK meet its short-term obligations with the cash in hand?
At the current liabilities level of NZ$26.68M liabilities, the company has been able to meet these commitments with a current assets level of NZ$58.09M, leading to a 2.18x current account ratio. Generally, for Electronic companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does RAK face the risk of succumbing to its debt-load?
RAK’s level of debt is low relative to its total equity, at 5.09%. RAK is not taking on too much debt commitment, which may be constraining for future growth. RAK’s risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.
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RAK’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for RAK’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Rakon to get a better picture of the stock by looking at: