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Is Restore plc (LON:RST) A Financially Sound Company?

Bruce Howe

While small-cap stocks, such as Restore plc (AIM:RST) with its market cap of UK£625.99M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into RST here.

How does RST’s operating cash flow stack up against its debt?

RST’s debt level has been constant at around UK£89.20M over the previous year – this includes both the current and long-term debt. At this constant level of debt, RST currently has UK£10.70M remaining in cash and short-term investments for investing into the business. Additionally, RST has generated cash from operations of UK£11.00M in the last twelve months, resulting in an operating cash to total debt ratio of 12.33%, signalling that RST’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In RST’s case, it is able to generate 0.12x cash from its debt capital.

Can RST pay its short-term liabilities?

With current liabilities at UK£45.40M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.24x. Generally, for Commercial Services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

AIM:RST Historical Debt May 18th 18

Is RST’s debt level acceptable?

With debt reaching 57.22% of equity, RST may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if RST’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For RST, the ratio of 11.08x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

RST’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, 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 RST has been performing in the past. You should continue to research Restore to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for RST’s future growth? Take a look at our free research report of analyst consensus for RST’s outlook.
  2. Valuation: What is RST 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 RST is currently mispriced by the market.
  3. 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.