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Rallye SA (EPA:RAL) is a small-cap stock with a market capitalization of €340m. 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? Given that RAL is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into RAL here.
RAL’s Debt (And Cash Flows)
Over the past year, RAL has maintained its debt levels at around €13b which accounts for long term debt. At this current level of debt, RAL's cash and short-term investments stands at €4.0b to keep the business going. Additionally, RAL has produced cash from operations of €1.5b during the same period of time, resulting in an operating cash to total debt ratio of 12%, indicating that RAL’s debt is not covered by operating cash.
Can RAL pay its short-term liabilities?
Looking at RAL’s €17b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of €18b, leading to a 1.01x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Consumer Retailing companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can RAL service its debt comfortably?
With total debt exceeding equity, RAL is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since RAL is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
RAL’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure RAL has company-specific issues impacting its capital structure decisions. You should continue to research Rallye to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RAL’s future growth? Take a look at our free research report of analyst consensus for RAL’s outlook.
- Valuation: What is RAL 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 RAL 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 firstname.lastname@example.org. 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.