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While small-cap stocks, such as Regis Healthcare Limited (ASX:REG) with its market cap of AU$1.13B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Healthcare companies, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is vital. 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’d encourage you to dig deeper yourself into REG here.
How does REG’s operating cash flow stack up against its debt?
Over the past year, REG has ramped up its debt from AU$210.30M to AU$255.00M , which is made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$21.66M , ready to deploy into the business. Additionally, REG has generated cash from operations of AU$151.05M in the last twelve months, leading to an operating cash to total debt ratio of 59.24%, meaning that REG’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In REG’s case, it is able to generate 0.59x cash from its debt capital.
Can REG pay its short-term liabilities?
At the current liabilities level of AU$1.03B liabilities, the company is not able to meet these obligations given the level of current assets of AU$36.26M, with a current ratio of 0.035x below the prudent level of 3x.
Is REG’s debt level acceptable?
REG is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In REG’s case, the ratio of 16.11x suggests that interest is comfortably 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:
Although REG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how REG has been performing in the past. You should continue to research Regis Healthcare to get a more holistic view of the stock by looking at: