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Are ReTo Eco-Solutions Inc’s (NASDAQ:RETO) Interest Costs Too High?

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Brandon Murphy
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Investors are always looking for growth in small-cap stocks like ReTo Eco-Solutions Inc (NASDAQ:RETO), with a market cap of US$181.62M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I recommend you dig deeper yourself into RETO here.

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

Over the past year, RETO has maintained its debt levels at around US$18.30M made up of current and long term debt. At this constant level of debt, RETO currently has US$1.59M remaining in cash and short-term investments for investing into the business. Moreover, RETO has produced US$3.94M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 21.52%, meaning that RETO’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In RETO’s case, it is able to generate 0.22x cash from its debt capital.

Can RETO pay its short-term liabilities?

At the current liabilities level of US$28.11M liabilities, the company is not able to meet these obligations given the level of current assets of US$21.14M, with a current ratio of 0.75x below the prudent level of 3x.

NasdaqCM:RETO Historical Debt Mar 5th 18
NasdaqCM:RETO Historical Debt Mar 5th 18

Does RETO face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 52.23%, RETO can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if RETO’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 RETO, the ratio of 6.39x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving RETO ample headroom to grow its debt facilities.

Next Steps:

RETO’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. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for RETO’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research ReTo Eco-Solutions to get a more holistic view of the stock by looking at:

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.