Rectifier Technologies Limited (ASX:RFT) is a small-cap stock with a market capitalization of AU$46m. 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? 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. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I suggest you dig deeper yourself into RFT here.
How much cash does RFT generate through its operations?
Over the past year, RFT has maintained its debt levels at around AU$1.8m including long-term debt. At this stable level of debt, RFT currently has AU$2.2m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of RFT’s operating efficiency ratios such as ROA here.
Can RFT meet its short-term obligations with the cash in hand?
Looking at RFT’s AU$2.7m in current liabilities, the company has been able to meet these obligations given the level of current assets of AU$6.7m, with a current ratio of 2.44x. Generally, for Electrical companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is RFT’s debt level acceptable?
With a debt-to-equity ratio of 35%, RFT’s debt level may be seen as prudent. RFT is not taking on too much debt commitment, which may be constraining for future growth. We can test if RFT’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For RFT, the ratio of 6.82x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as RFT’s high interest coverage is seen as responsible and safe practice.
RFT’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for RFT’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Rectifier Technologies to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RFT’s future growth? Take a look at our free research report of analyst consensus for RFT’s outlook.
- Historical Performance: What has RFT’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.
To help readers see past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.