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Real Good Food plc (LON:RGD) is a small-cap stock with a market capitalization of UK£6.5m. 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 RGD is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into RGD here.
RGD’s Debt (And Cash Flows)
Over the past year, RGD has ramped up its debt from UK£37m to UK£41m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at UK£10m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of RGD’s operating efficiency ratios such as ROA here.
Can RGD pay its short-term liabilities?
Looking at RGD’s UK£20m in current liabilities, the company has been able to meet these obligations given the level of current assets of UK£35m, with a current ratio of 1.79x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Food companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does RGD face the risk of succumbing to its debt-load?
RGD is a relatively highly levered company with a debt-to-equity of 85%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since RGD is presently 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.
Although RGD’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 RGD's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for RGD's financial health. Other important fundamentals need to be considered alongside. You should continue to research Real Good Food to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has RGD'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.
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.