RGC Resources, Inc. (NASDAQ:RGCO): Time For A Financial Health Check
Investors are always looking for growth in small-cap stocks like RGC Resources, Inc. (NASDAQ:RGCO), with a market cap of US$212m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I suggest you dig deeper yourself into RGCO here.
How much cash does RGCO generate through its operations?
Over the past year, RGCO has ramped up its debt from US$61m to US$70m , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at US$348k for investing into the business. Additionally, RGCO has produced cash from operations of US$14m during the same period of time, resulting in an operating cash to total debt ratio of 19%, indicating that RGCO’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 RGCO’s case, it is able to generate 0.19x cash from its debt capital.
Can RGCO meet its short-term obligations with the cash in hand?
With current liabilities at US$24m, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$16m, with a current ratio of 0.65x.
Is RGCO’s debt level acceptable?
RGCO is a relatively highly levered company with a debt-to-equity of 88%. 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 RGCO’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 RGCO, the ratio of 4.71x suggests that interest is appropriately 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:
RGCO’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. Though 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 RGCO’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research RGC Resources to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for RGCO’s future growth? Take a look at our free research report of analyst consensus for RGCO’s outlook.
Historical Performance: What has RGCO’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 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 editorial-team@simplywallst.com.
