Investors are always looking for growth in small-cap stocks like REC Silicon ASA (OB:REC), with a market cap of øre1.7b. However, an important fact which most ignore is: how financially healthy is the business? Semiconductor companies, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into REC here.
Does REC produce enough cash relative to debt?
REC has shrunken its total debt levels in the last twelve months, from US$188m to US$131m , which also accounts for long term debt. With this reduction in debt, REC currently has US$32m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of REC’s operating efficiency ratios such as ROA here.
Can REC pay its short-term liabilities?
With current liabilities at US$114m, it seems that the business has been able to meet these obligations given the level of current assets of US$159m, with a current ratio of 1.39x. Generally, for Semiconductor companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does REC face the risk of succumbing to its debt-load?
With total debt exceeding equities, REC is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since REC is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
REC’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 REC’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 REC has been performing in the past. I suggest you continue to research REC Silicon to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for REC’s future growth? Take a look at our free research report of analyst consensus for REC’s outlook.
- Historical Performance: What has REC’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.
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