While small-cap stocks, such as Restaurant Brands New Zealand Limited (NZSE:RBD) with its market cap of NZ$888.89M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into RBD here.
Does RBD generate enough cash through operations?
Over the past year, RBD has ramped up its debt from NZ$13.01M to NZ$46.91M , which comprises of short- and long-term debt. With this rise in debt, RBD’s cash and short-term investments stands at NZ$70.39M , ready to deploy into the business. Additionally, RBD has produced NZ$47.91M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 102.13%, signalling that RBD’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In RBD’s case, it is able to generate 1.02x cash from its debt capital.
Can RBD meet its short-term obligations with the cash in hand?
Looking at RBD’s most recent NZ$58.02M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.44x. Generally, for Hospitality companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is RBD’s debt level acceptable?
With a debt-to-equity ratio of 68.86%, RBD can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether RBD is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In RBD’s, case, the ratio of 14.6x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving RBD ample headroom to grow its debt facilities.
Next Steps:
Although RBD’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around RBD’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure RBD has company-specific issues impacting its capital structure decisions. I recommend you continue to research Restaurant Brands New Zealand to get a more holistic view of the small-cap by looking at: