Investors are always looking for growth in small-cap stocks like Recon Technology Ltd (NASDAQ:RCON), with a market cap of US$22.37M. However, an important fact which most ignore is: how financially healthy is the business? Energy Services companies, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I suggest you dig deeper yourself into RCON here.
Does RCON generate an acceptable amount of cash through operations?
RCON’s debt levels have fallen from CN¥13.47M to CN¥10.47M over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at CN¥3.81M , ready to deploy into the business. On top of this, RCON has generated cash from operations of CN¥5.67M in the last twelve months, resulting in an operating cash to total debt ratio of 54.18%, signalling that RCON’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In RCON’s case, it is able to generate 0.54x cash from its debt capital.
Can RCON meet its short-term obligations with the cash in hand?
With current liabilities at CN¥29.45M, the company has been able to meet these obligations given the level of current assets of CN¥68.39M, with a current ratio of 2.32x. Usually, for Energy Services companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is RCON’s debt level acceptable?
With debt at 33.28% of equity, RCON may be thought of as appropriately levered. This range is considered safe as RCON is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Risk around debt is very low for RCON, and the company also has the ability and headroom to increase debt if needed going forward.
RCON has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how RCON has been performing in the past. You should continue to research Recon Technology to get a better picture of the stock by looking at:
- 1. Historical Performance: What has RCON’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.