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Investors are always looking for growth in small-cap stocks like Regional Express Holdings Limited (ASX:REX), with a market cap of AU$167.53M. However, an important fact which most ignore is: how financially healthy is the business? 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 recommend you dig deeper yourself into REX here.
Does REX generate enough cash through operations?
REX’s debt levels have fallen from AU$30.28M to AU$23.63M over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, REX currently has AU$26.26M remaining in cash and short-term investments , ready to deploy into the business. Additionally, REX has generated cash from operations of AU$26.11M in the last twelve months, resulting in an operating cash to total debt ratio of 110.53%, meaning that REX’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In REX’s case, it is able to generate 1.11x cash from its debt capital.
Does REX’s liquid assets cover its short-term commitments?
With current liabilities at AU$56.52M, it appears that the company has been able to meet these commitments with a current assets level of AU$61.85M, leading to a 1.09x current account ratio. Usually, for Airlines companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is REX’s debt level acceptable?
With debt at 12.03% of equity, REX may be thought of as appropriately levered. This range is considered safe as REX is not taking on too much debt obligation, which may be constraining for future growth. We can test if REX’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 REX, the ratio of 15.4x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as REX’s high interest coverage is seen as responsible and safe practice.
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REX’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. Keep in mind I haven’t considered other factors such as how REX has been performing in the past. I recommend you continue to research Regional Express Holdings to get a more holistic view of the stock by looking at: