Investors are always looking for growth in small-cap stocks like Recce Limited (ASX:RCE), with a market cap of A$17.35M. However, an important fact which most ignore is: how financially healthy is the business? Pharmaceuticals companies, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into RCE here.

Does RCE generate enough cash through operations?

RCE has increased its debt level by about A$0.2M over the last 12 months comprising of short- and long-term debt. With this growth in debt, RCE’s cash and short-term investments stands at A$1.1M , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of RCE’s operating efficiency ratios such as ROA here.

Can RCE meet its short-term obligations with the cash in hand?

With current liabilities at A$0.7M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.67x. For Pharmaceuticals companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is RCE’s debt level acceptable?

With a debt-to-equity ratio of 27.33%, RCE’s debt level may be seen as prudent. RCE is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for RCE, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

Although RCE’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. Though, 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 RCE’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Recce to get a better picture of the stock by looking at:

1. Historical Performance: What has RCE’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.