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REV Group, Inc. (NYSE:REVG) is a small-cap stock with a market capitalization of US$791m. 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? Given that REVG is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into REVG here.
REVG’s Debt (And Cash Flows)
Over the past year, REVG has ramped up its debt from US$372m to US$472m , which accounts for long term debt. With this growth in debt, REVG's cash and short-term investments stands at US$14m to keep the business going. Moreover, REVG has generated cash from operations of US$14m over the same time period, resulting in an operating cash to total debt ratio of 2.9%, meaning that REVG’s debt is not covered by operating cash.
Can REVG meet its short-term obligations with the cash in hand?
Looking at REVG’s US$351m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.32x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Machinery companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can REVG service its debt comfortably?
With debt reaching 91% of equity, REVG may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since REVG is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
REVG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around REVG's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how REVG has been performing in the past. You should continue to research REV Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for REVG’s future growth? Take a look at our free research report of analyst consensus for REVG’s outlook.
- Valuation: What is REVG 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 REVG 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.