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How Financially Strong Is Restore plc (LON:RST)?

Simply Wall St

Investors are always looking for growth in small-cap stocks like Restore plc (LON:RST), with a market cap of UK£356m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into RST here.

Does RST produce enough cash relative to debt?

Over the past year, RST has ramped up its debt from UK£93m to UK£131m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at UK£16m , ready to deploy into the business. Additionally, RST has produced UK£18m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 14%, indicating that RST’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 RST’s case, it is able to generate 0.14x cash from its debt capital.

Can RST pay its short-term liabilities?

Looking at RST’s UK£44m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of UK£71m, with a current ratio of 1.62x. Usually, for Commercial Services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

AIM:RST Historical Debt, March 4th 2019

Does RST face the risk of succumbing to its debt-load?

RST is a relatively highly levered company with a debt-to-equity of 63%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether RST is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In RST’s, case, the ratio of 10.24x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as RST’s high interest coverage is seen as responsible and safe practice.

Next Steps:

RST’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. Since there is also no concerns around RST’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how RST has been performing in the past. You should continue to research Restore to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for RST’s future growth? Take a look at our free research report of analyst consensus for RST’s outlook.
  2. Valuation: What is RST 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 RST is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com. 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.