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Investors are always looking for growth in small-cap stocks like ReTo Eco-Solutions Inc (NASDAQ:RETO), with a market cap of US$100.1m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into RETO here.
How much cash does RETO generate through its operations?
RETO’s debt levels have fallen from US$18.3m to US$15.3m over the last 12 months – this includes both the current and long-term debt. With this debt payback, RETO currently has US$10.9m remaining in cash and short-term investments for investing into the business. Additionally, RETO has generated cash from operations of US$2.5m over the same time period, leading to an operating cash to total debt ratio of 16.5%, meaning that RETO’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In RETO’s case, it is able to generate 0.17x cash from its debt capital.
Can RETO pay its short-term liabilities?
Looking at RETO’s most recent US$26.6m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.27x. Usually, for Basic Materials 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.
Is RETO’s debt level acceptable?
With a debt-to-equity ratio of 29.7%, RETO’s debt level may be seen as prudent. This range is considered safe as RETO is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if RETO’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 RETO, the ratio of 10.12x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as RETO’s high interest coverage is seen as responsible and safe practice.
RETO’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure RETO has company-specific issues impacting its capital structure decisions. I recommend you continue to research ReTo Eco-Solutions to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for RETO’s future growth? Take a look at our free research report of analyst consensus for RETO’s outlook.
Historical Performance: What has RETO’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.
To help readers see past 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.
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