While small-cap stocks, such as RCG Corporation Limited (ASX:RCG) with its market cap of AUD A$412.14M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into RCG here.
How does RCG’s operating cash flow stack up against its debt?
RCG has built up its total debt levels in the last twelve months, from A$51M to A$104M , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at A$46M for investing into the business. Moreover, RCG has produced A$45M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 0.43x, indicating that RCG’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In RCG’s case, it is able to generate 0.43x cash from its debt capital.
Can RCG pay its short-term liabilities?
Looking at RCG’s most recent A$127M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.43x. Generally, for specialty retail companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can RCG service its debt comfortably?
With a debt-to-equity ratio of 28.18%, RCG’s debt level may be seen as prudent. This range is considered safe as RCG is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether RCG is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In RCG’s, case, the ratio of 13.62x suggests that interest is excessively covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Are you a shareholder? RCG’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. In the future, its financial position may be different. You should always be keeping abreast of market expectations for RCG’s future growth on our free analysis platform.