Stocks with market capitalization between $2B and $10B, such as Royal Gold Inc (NASDAQ:RGLD) with a size of $5.38B, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. I recommend you look at the following hurdles to assess RGLD’s financial health. See our latest analysis for Royal Gold
Can RGLD service its debt comfortably?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. RGLD’s debt-to-equity ratio stands at 23.16%, which means its risk of facing a debt-overhang is very low. We can test if RGLD’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings (EBIT) should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. RGLD’s profits amply covers interest at 4.32 times, which is seen as relatively safe. Debtors may be willing to loan the company more money, giving RGLD ample headroom to grow its debt facilities.
Can RGLD pay its short-term liabilities?
A different measure of financial health is measured by its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. We need to assess RGLD’s cash and other liquid assets against its upcoming expenses. Our analysis shows that RGLD is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Are you a shareholder? RGLD’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. Given that RGLD’s capital structure may change over time, I recommend researching market expectations for RGLD’s future growth on our free analysis platform.
Are you a potential investor? Although understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. Ultimately, debt financing is an important source of funding for companies seeking to grow through new projects and investments. RGLD’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass 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.