Recon Technology, Ltd. (NASDAQ:RCON) is a small-cap stock with a market capitalization of US$13m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Energy Services industry, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into RCON here.
How does RCON’s operating cash flow stack up against its debt?
Over the past year, RCON has ramped up its debt from CN¥10m to CN¥19m – this includes long-term debt. With this rise in debt, RCON currently has CN¥45m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of RCON’s operating efficiency ratios such as ROA here.
Does RCON’s liquid assets cover its short-term commitments?
With current liabilities at CN¥26m, it appears that the company has been able to meet these obligations given the level of current assets of CN¥101m, with a current ratio of 3.88x. Having said that, many consider a ratio above 3x to be high.
Can RCON service its debt comfortably?
RCON’s level of debt is appropriate relative to its total equity, at 22%. RCON is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with RCON, and the company has plenty of headroom and ability to raise debt should it need to in the future.
RCON’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for RCON’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Recon Technology to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RCON’s future growth? Take a look at our free research report of analyst consensus for RCON’s outlook.
- Valuation: What is RCON 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 RCON 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.
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 firstname.lastname@example.org.