Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
RCM Technologies, Inc. (NASDAQ:RCMT) is a small-cap stock with a market capitalization of US$50m. 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? Understanding the company's financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into RCMT here.
Does RCMT Produce Much Cash Relative To Its Debt?
RCMT has sustained its debt level by about US$28m over the last 12 months including long-term debt. At this stable level of debt, RCMT's cash and short-term investments stands at US$482k , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can examine some of RCMT’s operating efficiency ratios such as ROA here.
Can RCMT meet its short-term obligations with the cash in hand?
With current liabilities at US$23m, it seems that the business has been able to meet these commitments with a current assets level of US$59m, leading to a 2.54x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Professional Services 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 RCMT’s debt level acceptable?
Since total debt levels exceed equity, RCMT is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether RCMT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In RCMT's, case, the ratio of 4.75x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving RCMT ample headroom to grow its debt facilities.
Although RCMT’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around RCMT's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure RCMT has company-specific issues impacting its capital structure decisions. I recommend you continue to research RCM Technologies to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RCMT’s future growth? Take a look at our free research report of analyst consensus for RCMT’s outlook.
- Valuation: What is RCMT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether RCMT is currently mispriced by the market.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.