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What does Rocky Mountain Dealerships Inc’s (TSE:RME) Balance Sheet Tell Us About Its Future?

Rowena Gregory

Investors are always looking for growth in small-cap stocks like Rocky Mountain Dealerships Inc (TSX:RME), with a market cap of CA$249.46M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into RME here.

Does RME generate an acceptable amount of cash through operations?

RME’s debt levels have fallen from CA$412.02M to CA$347.95M over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, RME’s cash and short-term investments stands at CA$28.54M , ready to deploy into the business. Additionally, RME has generated cash from operations of CA$27.16M during the same period of time, resulting in an operating cash to total debt ratio of 7.81%, signalling that RME’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In RME’s case, it is able to generate 0.078x cash from its debt capital.

Can RME meet its short-term obligations with the cash in hand?

With current liabilities at CA$357.58M, the company has been able to meet these commitments with a current assets level of CA$508.27M, leading to a 1.42x current account ratio. For Trade Distributors companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

TSX:RME Historical Debt Mar 2nd 18

Can RME service its debt comfortably?

Since total debt levels have outpaced equities, RME 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. We can test if RME’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 RME, the ratio of 3.02x suggests that interest is appropriately 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:

At its current level of cash flow coverage, RME has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how RME has been performing in the past. I suggest you continue to research Rocky Mountain Dealerships to get a better picture of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.

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.