What does RhythmOne plc’s (LON:RTHM) Balance Sheet Tell Us About Its Future?
Investors are always looking for growth in small-cap stocks like RhythmOne plc (LON:RTHM), with a market cap of UK£146m. However, an important fact which most ignore is: how financially healthy is the business? Since RTHM is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into RTHM here.
How much cash does RTHM generate through its operations?
Over the past year, RTHM has ramped up its debt from US$3m to US$50m – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$37m , ready to deploy into the business. Moving onto cash from operations, 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 assess some of RTHM’s operating efficiency ratios such as ROA here.
Does RTHM’s liquid assets cover its short-term commitments?
At the current liabilities level of US$120m liabilities, the company has been able to meet these obligations given the level of current assets of US$165m, with a current ratio of 1.37x. For Interactive Media and 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 RTHM’s debt level acceptable?
With a debt-to-equity ratio of 18%, RTHM’s debt level may be seen as prudent. RTHM is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. RTHM’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
Although RTHM’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. Keep in mind I haven’t considered other factors such as how RTHM has been performing in the past. I suggest you continue to research RhythmOne to get a more holistic view of the stock by looking at:
Historical Performance: What has RTHM’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.
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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
