While small-cap stocks, such as Red Rock Resources plc (AIM:RRR) with its market cap of £2.78M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since RRR is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into RRR here.
Does RRR generate an acceptable amount of cash through operations?
Over the past year, RRR has ramped up its debt from £0.1M to £3.3M , which is mainly comprised of near term debt. With this growth in debt, RRR’s cash and short-term investments stands at £0.9M , ready to deploy into the business. Though its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of RRR’s operating efficiency ratios such as ROA here.
Can RRR meet its short-term obligations with the cash in hand?
Looking at RRR’s most recent £4.8M liabilities, the company has been able to meet these obligations given the level of current assets of £5.1M, with a current ratio of 1.06x. Generally, for metals and mining companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does RRR face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 26.75%, RRR’s debt level may be seen as prudent. RRR is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with RRR, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Are you a shareholder? Although RRR’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. Given that its financial position may change. You should always be researching market expectations for RRR’s future growth on our free analysis platform.
Are you a potential investor? Red Rock Resources currently has financial flexibility to ramp up growth in the future. In addition, its high liquidity means the company should continue to operate smoothly in the case of adverse events. To gain more conviction in the stock, you need to further examine the company’s track record. You should continue your analysis by taking a look at RRR’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.