Is Recon Technology Ltd’s (NASDAQ:RCON) Balance Sheet A Threat To Its Future?
Investors are always looking for growth in small-cap stocks like Recon Technology Ltd (NASDAQ:RCON), with a market cap of US$23.38M. However, an important fact which most ignore is: how financially healthy is the business? Energy Services companies, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I recommend you dig deeper yourself into RCON here.
How does RCON’s operating cash flow stack up against its debt?
RCON has shrunken its total debt levels in the last twelve months, from CN¥13.47M to CN¥10.47M – this includes both the current and long-term debt. With this reduction in debt, RCON currently has CN¥3.81M remaining in cash and short-term investments , ready to deploy into the business. On top of this, RCON has generated CN¥5.67M in operating cash flow during the same period of time, 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 interpreted as a measure of efficiency for unprofitable businesses since 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?
Looking at RCON’s most recent CN¥29.45M liabilities, it appears that the company has been able to meet these commitments with a current assets level of CN¥68.39M, leading to a 2.32x current account ratio. For Energy Services companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does RCON face the risk of succumbing to its debt-load?
RCON’s level of debt is appropriate relative to its total equity, at 18.94%. RCON is not taking on too much debt commitment, 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.
Next Steps:
RCON’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for RCON’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Recon Technology to get a more holistic view of the stock by looking at:
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.
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.
