RigNet Inc (NASDAQ:RNET) is a small-cap stock with a market capitalization of US$326m. 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? Energy Services companies, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into RNET here.
How much cash does RNET generate through its operations?
Over the past year, RNET has ramped up its debt from US$60m to US$71m , which includes long-term debt. With this rise in debt, RNET currently has US$21m remaining in cash and short-term investments , ready to deploy into the business. Additionally, RNET has produced cash from operations of US$9.7m over the same time period, resulting in an operating cash to total debt ratio of 14%, signalling that RNET’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In RNET’s case, it is able to generate 0.14x cash from its debt capital.
Can RNET pay its short-term liabilities?
At the current liabilities level of US$44m, it appears that the company has been able to meet these commitments with a current assets level of US$100m, leading to a 2.27x 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.
Is RNET’s debt level acceptable?
RNET is a relatively highly levered company with a debt-to-equity of 68%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since RNET is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
RNET’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for RNET’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research RigNet to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RNET’s future growth? Take a look at our free research report of analyst consensus for RNET’s outlook.
- Valuation: What is RNET 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 RNET 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.
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.
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