Investors are always looking for growth in small-cap stocks like RAVE Restaurant Group Inc (NASDAQ:RAVE), with a market cap of US$23.39M. However, an important fact which most ignore is: how financially healthy is the business? Since RAVE is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into RAVE here.
Does RAVE generate enough cash through operations?
Over the past year, RAVE has borrowed debt capital of around US$3.75M – this includes both the current and long-term debt. With this increase in debt, RAVE’s cash and short-term investments stands at US$451.00K , ready to deploy 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of RAVE’s operating efficiency ratios such as ROA here.
Can RAVE meet its short-term obligations with the cash in hand?
With current liabilities at US$6.74M, it seems that the business is not able to meet these obligations given the level of current assets of US$5.13M, with a current ratio of 0.76x below the prudent level of 3x.
Is RAVE’s debt level acceptable?
RAVE is a relatively highly levered company with a debt-to-equity of 44.73%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since RAVE is currently unprofitable, 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.
At its current level of cash flow coverage, RAVE has room for improvement to better cushion for events which may require debt repayment. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how RAVE has been performing in the past. I recommend you continue to research RAVE Restaurant Group to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has RAVE’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.
- 2. 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 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.