Resource Generation Limited (ASX:RES): Time For A Financial Health Check
Resource Generation Limited (ASX:RES) is a small-cap stock with a market capitalization of AU$48m. 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? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I suggest you dig deeper yourself into RES here.
How does RES’s operating cash flow stack up against its debt?
Over the past year, RES has ramped up its debt from AU$47m to AU$64m – this includes both the current and long-term debt. With this increase in debt, RES’s cash and short-term investments stands at AU$2m for investing into the business. Moving onto cash from operations, 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 assess some of RES’s operating efficiency ratios such as ROA here.
Can RES pay its short-term liabilities?
With current liabilities at AU$27m, it appears that the company may not have an easy time meeting these commitments with a current assets level of AU$2m, leading to a current ratio of 0.075x.
Is RES’s debt level acceptable?
With debt reaching 52% of equity, RES may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since RES is currently loss-making, 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.
Next Steps:
RES’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Furthermore, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure RES has company-specific issues impacting its capital structure decisions. I suggest you continue to research Resource Generation to get a better picture of the stock by looking at:
Historical Performance: What has RES’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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
