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Investors are always looking for growth in small-cap stocks like Red Rock Resources plc (LON:RRR), with a market cap of UK£3m. However, an important fact which most ignore is: how financially healthy is the business? Given that RRR is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I recommend you dig deeper yourself into RRR here.

Does RRR produce enough cash relative to debt?

In the previous 12 months, RRR’s rose by about UK£3m made up of predominantly near term debt. With this increase in debt, RRR currently has UK£125k remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of RRR’s operating efficiency ratios such as ROA here.

Can RRR pay its short-term liabilities?

With current liabilities at UK£5m, the company has been able to meet these commitments with a current assets level of UK£6m, leading to a 1.07x current account ratio. Generally, for Metals and Mining companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

Is RRR’s debt level acceptable?

With a debt-to-equity ratio of 20%, RRR’s debt level may be seen as prudent. This range is considered safe as RRR is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for RRR, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

RRR’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, 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 RRR’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Red Rock Resources to get a more holistic view of the stock by looking at:

1. Historical Performance: What has RRR’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.

2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.