Ruralco Holdings Limited (ASX:RHL) is a small-cap stock with a market capitalization of A$323.04M. 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? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into RHL here.
How does RHL’s operating cash flow stack up against its debt?
Over the past year, RHL has ramped up its debt from A$69.9M to A$114.0M – this includes both the current and long-term debt. With this increase in debt, RHL’s cash and short-term investments stands at A$22.8M , ready to deploy into the business. Additionally, RHL has produced cash from operations of A$14.2M in the last twelve months, leading to an operating cash to total debt ratio of 12.42%, meaning that RHL’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In RHL’s case, it is able to generate 0.12x cash from its debt capital.
Can RHL pay its short-term liabilities?
At the current liabilities level of A$477.4M liabilities, the company has been able to meet these obligations given the level of current assets of A$586.7M, with a current ratio of 1.23x. Generally, for retail distributors companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does RHL face the risk of succumbing to its debt-load?
RHL’s level of debt is appropriate relative to its total equity, at 39.21%. This range is considered safe as RHL is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if RHL’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 RHL, the ratio of 10.88x suggests that interest is excessively covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Are you a shareholder? Although RHL’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may be different. I recommend researching market expectations for RHL’s future growth on our free analysis platform.