Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as RingCentral, Inc. (NYSE:RNG) with a market-capitalization of US$9.9b, rarely draw their attention. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. RNG’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into RNG here.
Does RNG Produce Much Cash Relative To Its Debt?
RNG has built up its total debt levels in the last twelve months, from US$357m to US$407m , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$549m to keep the business going. On top of this, RNG has generated US$80m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 20%, signalling that RNG’s operating cash is less than its debt.
Can RNG meet its short-term obligations with the cash in hand?
With current liabilities at US$229m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.08x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio above 3x may be considered excessive by some investors.
Does RNG face the risk of succumbing to its debt-load?
RNG is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. However, since RNG 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.
Although RNG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around RNG's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure RNG has company-specific issues impacting its capital structure decisions. I recommend you continue to research RingCentral to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RNG’s future growth? Take a look at our free research report of analyst consensus for RNG’s outlook.
- Valuation: What is RNG 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 RNG 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.
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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.