Mid-caps stocks, like RealPage, Inc. (NASDAQ:RP) with a market capitalization of US$5.7b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at RP’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into RP here.
RP’s Debt (And Cash Flows)
RP's debt levels have fallen from US$649m to US$597m over the last 12 months , which also accounts for long term debt. With this debt repayment, RP's cash and short-term investments stands at US$228m to keep the business going. On top of this, RP has produced US$245m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 41%, indicating that RP’s operating cash is sufficient to cover its debt.
Can RP pay its short-term liabilities?
With current liabilities at US$412m, it appears that the company has been able to meet these obligations given the level of current assets of US$541m, with a current ratio of 1.31x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Software companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can RP service its debt comfortably?
With a debt-to-equity ratio of 56%, RP can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether RP is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In RP's, case, the ratio of 2.54x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
RP’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around RP's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how RP has been performing in the past. I recommend you continue to research RealPage to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RP’s future growth? Take a look at our free research report of analyst consensus for RP’s outlook.
- Valuation: What is RP worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether RP is currently mispriced by the market.
- 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.
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