Is Real Estate Investors plc (AIM:RLE) A Financially Sound Company?
While small-cap stocks, such as Real Estate Investors plc (AIM:RLE) with its market cap of GBP £112.78M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. 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. Check out our latest analysis for Real Estate Investors
Does RLE generate an acceptable amount of cash through operations?
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 adverse events bring devastation and yet does not absolve the company from its debt. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. RLE’s recent operating cash flow was 0.06 times its debt within the past year. This is concerning as its incoming cash can pay off less than a tenth of what the company must return in the near term.
Can RLE pay its short-term liabilities?
What about its commitments to other stakeholders such as payments to suppliers and employees? In times of adverse events, RLE may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that RLE is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Is RLE’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. RLE’s debt-to-equity ratio stands at 71.54%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet. While debt-to-equity ratio has several factors at play, an easier way to check whether RLE’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. RLE’s profits amply covers interest at 3.99 times, which is seen as relatively safe. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, RLE has room for improvement to better cushion for events which may require debt repayment. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that RLE’s financial situation may change. I recommend researching market expectations for RLE’s future growth on our free analysis platform.
Are you a potential investor? RLE’s large debt ratio along with low cash coverage of debt as well as low liquidity coverage of near-term commitments may not be what you’re after in an investment. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of RLE’s track record. You should continue your analysis by taking a look at RLE’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.
