Investors are always looking for growth in small-cap stocks like Rectifier Technologies Limited (ASX:RFT), with a market cap of A$30.07M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into RFT here.

How does RFT’s operating cash flow stack up against its debt?

RFT has built up its total debt levels in the last twelve months, from A$0.0M to A$1.8M – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at A$2.6M for investing into the business. On top of this, RFT has produced A$1.2M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 66.81%, indicating that RFT’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 RFT’s case, it is able to generate 0.67x cash from its debt capital.

Can RFT meet its short-term obligations with the cash in hand?

Looking at RFT’s most recent A$2.0M liabilities, the company has been able to meet these commitments with a current assets level of A$6.7M, leading to a 3.37x current account ratio. However, anything above 3x is considered high and could mean that RFT has too much idle capital in low-earning investments.

Can RFT service its debt comfortably?

With a debt-to-equity ratio of 33.87%, RFT’s debt level may be seen as prudent. This range is considered safe as RFT is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if RFT’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 RFT, the ratio of 16.03x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving RFT ample headroom to grow its debt facilities.

Next Steps:

RFT has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how RFT has been performing in the past. I suggest you continue to research Rectifier Technologies to get a better picture of the stock by looking at:

• 1. Historical Performance: What has RFT’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 pass 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.