Investors are always looking for growth in small-cap stocks like Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH), with a market cap of US$740m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into RUTH here.
RUTH’s Debt (And Cash Flows)
RUTH has shrunk its total debt levels in the last twelve months, from US$50m to US$41m , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$5.1m to keep the business going. Moreover, RUTH has produced cash from operations of US$78m in the last twelve months, leading to an operating cash to total debt ratio of 191%, meaning that RUTH’s current level of operating cash is high enough to cover debt.
Does RUTH’s liquid assets cover its short-term commitments?
With current liabilities at US$95m, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$36m, leading to a current ratio of 0.38x. The current ratio is calculated by dividing current assets by current liabilities.
Can RUTH service its debt comfortably?
With a debt-to-equity ratio of 45%, RUTH can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In RUTH’s case, the ratio of 30.57x suggests that interest is comfortably 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.
RUTH’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how RUTH has been performing in the past. I suggest you continue to research Ruth’s Hospitality Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RUTH’s future growth? Take a look at our free research report of analyst consensus for RUTH’s outlook.
- Valuation: What is RUTH 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 RUTH 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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