RGC Resources, Inc. (NASDAQ:RGCO): Time For A Financial Health Check
RGC Resources, Inc. (NASDAQ:RGCO) is a small-cap stock with a market capitalization of US$219m. 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? Assessing first and foremost the financial health is crucial, 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. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into RGCO here.
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RGCO’s Debt (And Cash Flows)
RGCO's debt levels surged from US$55m to US$87m over the last 12 months – this includes long-term debt. With this rise in debt, RGCO's cash and short-term investments stands at US$2.0m to keep the business going. Additionally, RGCO has generated cash from operations of US$14m in the last twelve months, leading to an operating cash to total debt ratio of 16%, signalling that RGCO’s current level of operating cash is not high enough to cover debt.
Does RGCO’s liquid assets cover its short-term commitments?
With current liabilities at US$21m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.86x. The current ratio is the number you get when you divide current assets by current liabilities.
Does RGCO face the risk of succumbing to its debt-load?
RGCO is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 RGCO's case, the ratio of 4.13x 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:
Although RGCO’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure RGCO has company-specific issues impacting its capital structure decisions. I recommend you continue to research RGC Resources to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for RGCO’s future growth? Take a look at our free research report of analyst consensus for RGCO’s outlook.
Historical Performance: What has RGCO's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.
