Recon Technology Ltd (NASDAQ:RCON) is a small-cap stock with a market capitalization of USD $10.62M. 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. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. View our latest analysis for Recon Technology
How does RCON’s operating cash flow stack up against its debt?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These catastrophes does not mean the company can stop servicing its debt obligations. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. Last year, RCON’s operating cash flow was 0.54x its current debt. This is a good sign, as over half of RCON’s near term debt can be covered by its day-to-day cash income, which reduces its riskiness to its debtholders.
Can RCON meet its short-term obligations with the cash in hand?
What about its commitments to other stakeholders such as payments to suppliers and employees? As cash flow from operation is hindered by adverse events, RCON may need to liquidate its short-term assets to meet these upcoming payments. We test for RCON’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that RCON does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Is RCON’s level of debt at an acceptable level?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. RCON’s debt-to-equity ratio stands at 25.10%, which indicates that its debt is at an acceptable level.
Are you a shareholder? RCON’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. In the future, its financial position may change. I recommend keeping abreast of market expectations for RCON’s future growth on our free analysis platform.
Are you a potential investor? Although RCON’s debt level is relatively low, it has the ability to efficiently utilise its borrowings to generate ample cash flow coverage. Moreover, its high liquidity means the company should continue to operate smoothly in the case of adverse events. To gain more confidence in the stock, you need to further analyse the company’s track record. As a following step, you should take a look at RCON’s past performance analysis on our free platform to conclude on RCON’s financial health.
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.