Castle Brands Inc (AMEX:ROX) is a small-cap stock with a market capitalization of USD $200.45M. 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? Since ROX is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into ROX here.
Does ROX generate enough cash through operations?
Over the past year, ROX has ramped up its debt from $13.8M to $34.9M , which comprises of short- and long-term debt. With this growth in debt, ROX’s cash and short-term investments stands at $0.6M , ready to deploy into the business. Though its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of ROX’s operating efficiency ratios such as ROA here.
Can ROX meet its short-term obligations with the cash in hand?
With current liabilities at $14.4M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $45.5M, leading to a 3.17x current account ratio. However, anything about 3x may be excessive, since ROX may be leaving too much capital in low-earning investments.
Can ROX service its debt comfortably?
ROX is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since ROX is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Are you a shareholder? ROX’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that its financial position may be different. I recommend researching market expectations for ROX’s future growth on our free analysis platform.
Are you a potential investor? With a high level of debt on its balance sheet, ROX could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for ROX to increase its operational efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. You should continue your analysis by taking a look at ROX’s past performance analysis on our free platform to figure out ROX’s financial health position.
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.