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RLJ Entertainment Inc (NASDAQ:RLJE) is a small-cap stock with a market capitalization of US$68.60M. 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? Given that RLJE is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into RLJE here.
How does RLJE’s operating cash flow stack up against its debt?
RLJE’s debt levels surged from US$42.05M to US$52.64M over the last 12 months , which is made up of current and long term debt. With this growth in debt, RLJE currently has US$6.22M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of RLJE’s operating efficiency ratios such as ROA here.
Can RLJE meet its short-term obligations with the cash in hand?
At the current liabilities level of US$73.62M 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 1.4x. For Media companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is RLJE’s debt level acceptable?
Since total debt levels have outpaced equities, RLJE is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since RLJE is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
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RLJE’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure RLJE has company-specific issues impacting its capital structure decisions. I suggest you continue to research RLJ Entertainment to get a more holistic view of the stock by looking at: