Are Rogers Sugar Inc.'s (TSE:RSI) Interest Costs Too High?
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While small-cap stocks, such as Rogers Sugar Inc. (TSE:RSI) with its market cap of CA$635m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into RSI here.
RSI’s Debt (And Cash Flows)
Over the past year, RSI has maintained its debt levels at around CA$338m – this includes long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at CA$8.1m to keep the business going. Additionally, RSI has produced CA$65m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 19%, indicating that RSI’s debt is not covered by operating cash.
Can RSI pay its short-term liabilities?
With current liabilities at CA$127m, it appears that the company has been able to meet these commitments with a current assets level of CA$265m, leading to a 2.09x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Food companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is RSI’s debt level acceptable?
With debt reaching 96% of equity, RSI 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. We can check to see whether RSI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In RSI's, case, the ratio of 4.28x 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:
RSI’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 RSI's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for RSI's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Rogers Sugar to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for RSI’s future growth? Take a look at our free research report of analyst consensus for RSI’s outlook.
Valuation: What is RSI 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 RSI 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 editorial-team@simplywallst.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.
