Resolute Mining Limited (ASX:RSG) is a small-cap stock with a market capitalization of AUD A$756.31M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into RSG here.
How does RSG’s operating cash flow stack up against its debt?
Over the past year, RSG has ramped up its debt from A$27M to A$35M , which is made up of current and long term debt. With this rise in debt, RSG currently has A$286M remaining in cash and short-term investments , ready to deploy into the business. On top of this, RSG has generated A$186M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 5.39x, meaning that RSG’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In RSG’s case, it is able to generate 5.39x cash from its debt capital.
Can RSG pay its short-term liabilities?
Looking at RSG’s most recent A$122M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of A$498M, with a current ratio of 4.07x. Though, anything about 3x may be excessive, since RSG may be leaving too much capital in low-earning investments.
Can RSG service its debt comfortably?
RSG’s level of debt is low relative to its total equity, at 5.32%. RSG is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if RSG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For RSG, the ratio of 1063.79x suggests that interest is excessively covered, which means that debtors may be willing to loan the company more money, giving RSG ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? RSG’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. In the future, RSG’s financial situation may change. I recommend keeping abreast of market expectations for RSG’s future growth on our free analysis platform.