While small-cap stocks, such as RCM Technologies Inc (NASDAQ:RCMT) with its market cap of US$46m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is 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. However, since I only look at basic financial figures, I recommend you dig deeper yourself into RCMT here.
Does RCMT produce enough cash relative to debt?
Over the past year, RCMT has ramped up its debt from US$10m to US$29m , which is made up of current and long term debt. With this growth in debt, RCMT’s cash and short-term investments stands at US$431k , 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of RCMT’s operating efficiency ratios such as ROA here.
Does RCMT’s liquid assets cover its short-term commitments?
With current liabilities at US$19m, the company has been able to meet these commitments with a current assets level of US$56m, leading to a 2.94x current account ratio. Usually, for Professional Services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does RCMT face the risk of succumbing to its debt-load?
RCMT is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In RCMT’s case, the ratio of 6.46x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as RCMT’s high interest coverage is seen as responsible and safe practice.
RCMT’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. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for RCMT’s financial health. Other important fundamentals need to be considered alongside. You should continue to research RCM Technologies to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RCMT’s future growth? Take a look at our free research report of analyst consensus for RCMT’s outlook.
- Historical Performance: What has RCMT’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 email@example.com.